Chinese Yuan General Info
The Chinese currency is actually called renminbi, but you will more frequently hear it called by the name of its primary unit, the yuan. The renminbi-yuan relationship is similar to that of Britain’s sterling-pound (sterling being the name of the currency and a pound being one unit of that currency). The ISO for renminbi, or the yuan, is CNY. An ISO of CHN denotes yuan traded in offshore markets, such as Hong Kong.
According to the Bank for International Settlements’ 2016 survey of the foreign exchange market, the yuan is now the world’s eighth most traded currency and has overtaken the Mexican peso to become the world’s most traded emerging market currency. However, disappointingly, 95% of all yuan trading remains against just one other currency, the US dollar.
The yuan reached its all-time low against the dollar in January 1994 when the exchange rate for USD/CNY reached 8.73. Its all-time high occurred in January 1981 when USD/CNY hit 1.53.
A high point for Chinese officials in recent years came when the yuan was added to the IMF’s Special Drawing Rights basket of currencies in October 2016 and, with its inclusion, joined the dollar, euro, yen and the pound as an official world reserve currency.
Importantly, China’s currency is not freely floating, which is to say that it is not determined wholly by market forces or purely by demand and supply. While market forces do play a part in China’s ‘managed float’ system, daily changes to the value of the yuan are restricted by the country’s central bank to moves of 2% above or below a midpoint, or reference rate, against the US dollar. This special rate is set each day by the central bank after consideration of the values of currencies from China’s main trading partners.
CNY - Market View
Gains in May of 2.3% versus the US dollar made the yuan Asia’s best performing currency of the month. May’s move took the currency’s total gain against the dollar in 2017 to 3.5%.
May’s sudden surge in the yuan, against its long-term downtrend, surprised many analysts. The move is largely attributed to China’s central bank, who keep firm control of their currency’s value and who are known to intervene in foreign exchange markets for various reasons. China controls its currency using a ‘managed float’ system in which yuan movements are restricted each day around a central rate.
It is possible that China has pushed their currency higher in some kind of demonstration of strength as a rebuke to US ratings agency Moody’s, who in May downgraded the country’s credit rating for the first time since 1989.
Other possibilities include the Chinese authorities succumbing to US political pressure. The Trump administration have for much of the past year been critical of the yuan’s valuation. Trump himself has suggested several times that China are undervaluing their currency to gain a trade advantage over the US.
China’s central bank, who seek to avoid any sharp depreciation in the yuan, may also be out to discourage speculation – essentially to burn those betting on a fall in the currency’s value.