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A Brief Backgrounder on China’s Currency: Money, Markets, and Manipulation

The Basics:

China has two currencies. One trades in China (CNY) with some restrictions and the other trades freely in Hong Kong (CNH). The currency is often referred to as the RMB (renminbi) or the Chinese Yuan (Yuan for short).

The value of this note (inside China) vs the USD is limited to a 2% change in value on a daily basis.

In Hong Kong, Singapore or London the same note, now traded under the moniker “CNH” – has zero trading restrictions.


The offshore market was created in Hong Kong in 2004 (other cities like London have since added offshore RMB markets of their own) to help foreign institutions trade or settle debts in RMB. If you trade RMB with a foreign bank, say Bank of America, you are trading based on the CNH rate. If you want to trade based on the CNY rate you need to go to a Chinese bank.

Okay, but why doesn’t China just let all the College Juniors getting ready to study-abroad in Beijing or the Hog Exporters in Iowa settle their RMB on the onshore exchange?

If the full supply of RMB were open to the global markets the People’s Bank Of China (PBOC) would not have control over the exchange rate and thus the economy. To combat flows of capital out of China the government heavily monitors corporate spending abroad and limits the amount of USD each Chinese citizen can buy each year to $50,000. China also has a massive amount of foreign currency reserves that it frequently utilizes to buy RMB and prop the price up (more on this below).

Okay, but a market rate and a controlled rate are going to be different. Would this not create arbitrage opportunities where it’s better to cash out your RMB in one market than in the other?

Yes, it does. But financial institutions and forex players with access to both markets will capitalize on this by receiving money in CNY and cashing out in CNH (or vise-versa). This drives the rate back to equilibrium.

Okay, so China is in fact manipulating their currency?

This is up for debate. When Trump refers to China as a currency manipulator he often does so in the context of hurting US manufacturing jobs. In other words, Trump claims China is devaluing their currency to make it more attractive for foreign markets to buy Chinese goods.

As mentioned, China has been spending their FX reserves (using USD and other currencies) to buy RMB thus propping up the price.

Adding to this, Andy Rothman (Investment Strategist at Matthews Asia) in his Sinology Blog:

“(The US Treasury) went on to note that “China’s intervention in foreign exchange markets has sought to prevent a rapid RMB depreciation that would have negative consequences for the Chinese and global economies.” In other words, China was in 2016 manipulating its currency for purposes which are aligned with U.S. interests.”

Also, as recently as 2015 the IMF declared the Yuan was no longer undervalued.

Right. I’ve heard these foreign exchange reserves are about to runout. Won’t this cause a runaway RMB and a Global meltdown?

China’s FX reserves dropped by around 9% in 2016. If they were to drop another 10% in 2017 they would still have close to 3 trillion USD in FX reserves. The next closest country, Japan, has only 1.16 trillion.

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