Renminbi vs. Yuan: What's the difference for your business?
Navigating China's economic landscape, especially if you've got suppliers or business partners there, comes with its own set of intricacies. Among them, understanding the difference between terms like 'renminbi' and 'yuan', or why there are both CNH and CNY, can be perplexing.
This article seeks to shed light on these terms, clarifying their differences and highlighting their importance. Beyond mere definitions, we'll delve into why grasping these nuances can give your business a competitive edge in China.
A glimpse into the history of Chinese currency
China's monetary history is as rich and varied as its cultural tapestry. Before the modern era of paper and coins, ancient China used objects like shells, mini metal knives, and spade coins as mediums of exchange. Fast forward to the 20th century, the introduction of the renminbi marked a turning point in China's monetary history.
Following the establishment of the People's Republic of China in 1949, the nation sought to consolidate its fragmented currency system and introduced the renminbi (RMB) – meaning "People's Currency". It was a move symbolic of the new government's focus on representing the people and bringing economic stability.
Renminbi (RMB) vs. Yuan (CNY): China's official currency
Though used interchangeably in many contexts, renminbi and yuan are not synonyms. Renminbi is the official name of the currency, while yuan is its primary unit.
Think of the distinction as similar to the British 'pound sterling' (the official name) and the 'pound' (the basic unit). So, when someone says something costs 100 yuan, they're specifying an amount, but when they refer to payments in renminbi, they're referring to the currency in a broader sense.
The multi-layered structure: Yuan, Jiao, and Fen
The Chinese currency system is hierarchical. The yuan, often represented with the symbol "¥", is the base.
- Yuan (¥): Comparable to the dollar or euro, it's the primary unit.
- Jiao (角): One yuan is divided into 10 jiao. It's akin to the relationship between a dollar and a dime in the U.S.
- Fen (分): One jiao is further divisible into 10 fen, making 100 fen equal to one yuan. In practical everyday transactions, fen have become somewhat obsolete due to their minimal value, much like the penny in various Western economies.
Why does China "need" two currencies?
This is a common misconception. China doesn't have "two currencies", but there are onshore and offshore markets for the renminbi.
- CNY: This is the "onshore" yuan, traded within mainland China and tightly controlled by the Chinese central bank, the People’s Bank of China (PBOC). The PBOC sets a daily reference rate for the CNY, allowing it to fluctuate within a 2% range.
- CNH: This is the "offshore" yuan, traded outside mainland China, primarily in Hong Kong. The CNH isn't subject to the same regulations and restrictions as the CNY, allowing it to be more influenced by market forces.
This distinction exists due to China's unique approach to its currency, aiming to maintain control over its value and restrict capital flows. The two markets allow China to keep its domestic financial system insulated while promoting the international use of the renminbi.
CNY vs. CNH: Why the distinction matters for businesses and investors
The distinction between onshore and offshore yuan markets was developed to gradually internationalise the yuan without completely opening up China's capital account. By creating an offshore market, China can allow the yuan to be used for global trade and investment, while still maintaining control over its onshore market.
For a foreign business with ties in China, the main practical difference often boils down to the exchange rate when making payments, given that variations can arise between the onshore and offshore rates due to distinct regulatory frameworks and market dynamics. In recent years, the Chinese government has taken steps to bridge the gap between onshore and offshore markets and increase the international usage of the yuan, but the two markets still exist due to the reasons mentioned above.
International role of the Chinese Yuan in Trade and Finance
The role of the yuan in both international trade and finance has expanded notably over the past few decades. Below is an overview of its growing significance:
China is one of the world’s largest trading nations. As its trade volume grew, so did the use of the yuan as an international currency for trade settlement. Many countries, especially those in Asia and Africa, began settling their trade with China in yuan to reduce their dependence on the US dollar and to benefit from closer trade ties with China.
Bilateral Currency Swap Agreements
China has set up bilateral currency swap agreements with numerous countries. These currency peg agreements allow two countries to exchange their currencies, which can be used to stabilise trade between the two nations or stabilise the exchanged currency's value.
China’s Belt and Road Initiative (BRI)
This ambitious infrastructure project aims to connect China with Europe, Africa, and other parts of Asia via additional railways, roads and maritime routes. One of its goals is to promote the use of the yuan in international transactions, which would further enhance its international role.
Inclusion in IMF’s SDR Basket
In 2016, the International Monetary Fund (IMF) added the yuan to its basket of Special Drawing Rights (SDR) currencies, which includes the US dollar, Euro, Japanese yen, and British pound. This marked a significant recognition of the Yuan's global importance.
Offshore RMB Centres
China has been promoting the establishment of offshore RMB centres in key global financial hubs, such as London, Hong Kong, and Singapore. These centres facilitate the use and trading of the yuan in international markets.
Known as "Dim Sum" bonds, these are issued outside of China but denominated in yuan. They have been a tool for companies to raise yuan-denominated capital outside of China.
Over the years, China has taken steps to open its financial markets to overseas investors, such as through the Bond Connect and Stock Connect programs with Hong Kong, allowing international investors to invest in mainland Chinese stocks and bonds using the yuan.
More central banks around the world have started including the Chinese renminbi in their foreign exchange reserves, reflecting a growing confidence in the currency.
How does trading in CNH/CNY benefit your business?
For businesses looking to have a footprint in the Chinese market, trading in CNH can offer various advantages:
The CNH isn't subject to the same tight controls as the CNY, companies can more easily implement strategies to protect themselves from adverse currency movements. This means they can secure more predictable financial outcomes and reduce unexpected losses from currency fluctuations.
As the CNH market operates outside of mainland China, it gives foreign companies more freedom in how they manage their currency transactions, including more straightforward repatriation of funds and the ability to engage in a broader set of financial activities.
The increasing international acceptance of the yuan and Hong Kong's status as a major global financial hub has led to ensuring that businesses can execute large trades without significantly moving the market price. A liquid market is also associated with tighter bid-ask spreads, reducing the costs of business transactions.
Increased Trade Opportunities:
Given China's dominant position in global trade, many international businesses find themselves transacting frequently with Chinese companies. Settling these transactions in CNH allows for smoother trade financing operations, potentially offering better terms and quicker settlement times.
Investors can now invest in CNH-denominated bonds, equities, and other financial instruments. This provides foreign investors with an opportunity to gain exposure to yuan-denominated assets without the direct regulatory implications of the onshore market.
Enhanced Relationship with Chinese Partners:
Choosing to transact in CNH is more than just a financial decision; it's a gesture that resonates with the preferences of your Chinese counterparts. Such an approach shows a deep commitment to the Chinese market. Moreover, understanding the cultural nuances of Chinese business culture can further cement trust, paving the way for richer and more lasting business collaborations.
How to start dealing in CNH/CNY?
As China continues its trajectory towards economic dominance, its role in global finance will undoubtedly continue to grow. Just in the last year, the number of transactions in CNH among MultiPass customers has more than doubled. Trading in CNH can be an effective strategy for businesses looking to engage with China and tap into the numerous opportunities the Chinese economy presents.
Now it's easier than ever to start doing business in yuan – with a MultiPass business account you can get as much of China's currency as you need using the instant FX tool and manage it along with EUR, USD, GBP and 30+ other foreign currencies with no hassle.
By taking control of the FX and choosing to transact in yuan, you avoid unnecessary conversions and charges applied by traditional banks. Moreover, this way you can be sure your suppliers and partners in China receive the full expected amount securely and on time. And with our local account details in the UK, US and EU, and a dedicated manager to help you out, building relationships with overseas businesses becomes a breeze.
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