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
After consideration of China’s current account balance, external balance sheet, capital flows and reserves, the IMF said in late July that the current valuation of the yuan was consistent with fundamentals.
At the time of the IMF report the yuan was buying $0.149 (USD/CNY 6.725), having risen in eight of the eleven preceding weeks.
Much of the yuan’s gain against the dollar to July was, however, formed from the dollar side, rather than because of anything particularly positive about China’s economic outlook. The dollar has tumbled this year as investors have unwound their ‘Trumpflation’ trades and following a spate of poor US inflation data.
Despite gaining against USD, it could not be said at the time of this report that China’s currency had done well in relative terms. By late July the yuan’s year-to-date gain stood at 3.3%, but the US Dollar Index (DXY) had fallen more than 8.5% and other Asian currencies like the South Korean won (+7.7%) and Thai baht (7.6%) had gained significantly more than the yuan.
Against other majors, at the time of this report the yuan was falling steadily, especially against the Canadian dollar, Australian dollar and euro.