Chinese Yuan-CNY

Chinese Yuan (CNY) or the Renminbi is the official currency of the People’s Republic of China. This is currency is denoted by symbol ¥ and the code in international exchange markets is RMB.

While Renminbi is the legal tender in mainland China, it is not the case in greater China (Hong Kong or Macau).  Renminbi is governed by country’s central bank, the People’s Bank of China.

The primary unit of renminbi is the yuan and is denoted by symbol (元). One yuan is subdivided into 10 jiao (角); a jiao in turn is subdivided into 10 fen (分).

The denominations available in Renminbi banknotes range from 1 jiao to 100 yuan (¥0.1–100) while coins have denominations from 1 fen to 1 yuan (¥0.01–1). So, some denominations exist in coins and banknotes, but they are typically used in coins if under ¥1. The usage of Coins under ¥0.1 is very rear.

For the most part of its history, the Renminbi was pegged to the US dollar; however, as China decided to gradually shift from a controlled economy (central planning) to a free market economy, and increased its presence in international trade, the currency was devalued significantly to increase the competitiveness of the Chinese Industry in global stage.

It has been argued by many experts that China has artificially kept the official exchange rate of Renminbi lower than the value measured at purchasing power parity. Currently, the renminbi is thought to be undervalued by 37.5%.

Even though China allowed the renminbi exchange rate to float from 2005, it is only allowed to move by narrow margin hovering around fixed base rate with regard to basket of major traded currencies.

The Chinese government’s official stance has been to gradually increase the flexibility of the exchange rate. China has also initiated numerous pilot projects to “internationalize” the RMB in the hope that it will turn out to be a reserve currency over the long term.

Etymology

Various types of currencies circulated in China during the Republic of China (ROC) era, most of which were denominated in the unit “yuán” (pronounced [jʏɛn˧˥]). Each of these was distinguishable by different currency name, such as the fabi (“legal tender”), the “gold yuan”, and the “silver yuan”. The word yuan (written as 元 (informally) or 圓 (formally)) in Chinese literally means round, and since most coins are round in shape, it got this name.

The Korean and Japanese currency units, won and yen respectively, are in fact derived from the word the yuan and have the same Chinese character(hanja/kanji) representation, but in varied forms (respectively, 원/圓 and 円/圓), also meaning round in Korean and Japanese. However, they do not share the same names for the subdivisions. The principal unit of New Taiwan dollar, used in Taiwan as the currency of the Republic of China, is also referred to in the Chinese language as “yuán” (written as 元 or 圓).

Ever since communist Party of China took over the control of most territories in the later part of the Chinese Civil War, its People’s Bank of China started (in 1948) to issue a unified currency for use in Communist-controlled territories.

Although the currency issued under communist regime were denominated in yuan, the banknotes, though were identified by different names, including “People’s Bank of China banknotes” (simplified Chinese: 中国人民银行钞票; traditional Chinese: 中國人民銀行鈔票; from November 1948), “New Currency” (simplified Chinese: 新币; traditional Chinese: 新幣; from December 1948), “People’s Bank of China notes” (simplified Chinese 中国人民银行券; traditional Chinese: 中國人民銀行券; from January 1949), “People’s Notes” (人民券, as an acronym of the last name), and finally “People’s Currency”, or “renminbi“, from June 1949.

Production and Mining

The state owned corporation, China Banknote Printing and Minting manages the production of the renminbi. This currency production unit is headquartered in Beijing.

CBPMC has set up many printing, engraving and minting facilities around the country to produce banknotes and coins for subsequent distribution.

While banknote printing facilities are based in Beijing, Shanghai, Chengdu, Xi’an, Shijiazhuang, and Nanchang, mints are located in Nanjing, Shanghai, and Shenyang.

In addition, high grade paper for the banknotes is produced at two facilities in Baoding and Kunshan. According to its website, The Baoding facility claims to be the largest facility in the world dedicated to developing banknote material. The People’s Bank of China has its own printing technology research division that researches novel techniques for creating banknotes, making counterfeiting more difficult.

The First series of Banknotes

In December 1948, the People’s Republic Bank of China introduced the first series of banknotes- about a year before when People’s Republic of China was established. The currency was issued only in paper money form, replacing different currencies that were circulated in the territories controlled by the communists. One of the prime objectives of the new government was to bring an end to hyperinflation that had plagued China in the final years of the Kuomintang (KMT) era.

Once inflation was brought under control, a currency revaluation came about in 1955, at the rate of 1 new yuan = 10,000 old yuan.

On December 1, 1948, the newly established People’s Bank of China introduced notes in denominations of 1, 5, 10, 20, 50, 100 and 1000 yuan; this was followed by new denominations of 200, 500, 5000 and 10,000 yuan in 1949, with 50,000 yuan notes added in 1950. In all, there were 62 different designs issued.  However, these notes were officially withdrawn from the system on various dates between April 1 and May 10, 1955.

These first renminbi notes were printed with words such as  “People’s Bank of China”, “Republic of China”, while the denomination was written in Chinese characters by Dong Biwu.

In June 1949, the word “renminbi” was recorded as an official currency name. After 1950, when second series of notes were printed, the first series was dubbed as the “first series of the renminbi”

Second to fifth series

In 1955, the second series of renminbi banknotes was introduced. During the period of the command economy, the value of the renminbi was kept at very unrealistic values in exchange vis-à-vis western currency alongside some severe currency exchange rules. As the economy of mainland Chinese opened up to international trade in 1978, a dual-track currency system was introduced, with renminbi usable only domestically, and with foreigners required to use only foreign exchange certificates. The unjustifiably high levels at which exchange rates were pegged resulted in the development of a strong black market in currency transactions.

Between the period of late 1980s and early 1990s, China brought few changes in an effort to make RMB more convertible. With the use of swap centers, the exchange rate was brought to practical levels even as the dual track currency system was abolished.

Although the renminbi is convertible on current accounts, it is not possible in capital accounts. The eventual goal has been to make the RMB entirely convertible. However, partly in response to the Asian financial crisis in 1998, China has been apprehensive that the mainland Chinese financial system would not be able to manage a very likely and rapid flow of hot money from cross-border movements and accordingly, as of 2012, the currency trades within a narrow band have been specified by the Chinese central government.

The fen and jiao have become increasingly redundant as prices have increased. Chinese retailers tend to avoid keeping prices with decimal values (such as ¥9.99), opting instead for integer values of yuan (such as ¥9 or ¥10).

Coins

In 1955, aluminium coins with denomination of 1, 2 and 5 fen were introduced. In 1980, brass 1, 2, and 5 jiao and cupro-nickel 1 yuan coins were issued; however, the 1 and 2 jiao were only produced until 1981, with the last series of 5 jiao and 1 yuan issued in 1985. In 1991, a new coinage (changes in metal) was introduced, which included an aluminium 1 jiao, brass 5 jiao and nickel-clad-steel 1 yuan.

While the issuance of the 1 and 2 fen coins completely ended in 1991, 5 fen were halted a year later.  The minting of small coins continued in annual mint sets, and from the beginning of 2005 again for general circulation. New designs with denominations 1 and 5 jiao and 1 yuan were introduced in between 1999 and 2002. The frequency of coins usage bearing different denominations depend upon one region to another in China.

Banknotes

In 1955, notes (dated 1953), were being circulated with denominations of 1, 2 and 5 fen, 1, 2 and 5 jiao, and 1, 2, 3, 5 and 10 yuan. Except for for the three fen denominations and the 3 yuan, notes in these denominations still continue to circulate, with 50 and 100 yuan notes issued in 1980 and 20 yuan notes introduced in or after 1999.

The denomination of each and every banknote is printed in Chinese script. The numbers are printed  both in financial Chinese numeral characters, as well as Arabic numerals. The denomination and the words “People’s Bank of China” are also printed in Mongolian,Tibetan, Uyghur and Zhuang on the reverse of each banknote, as well  the boldface Hanyu Pinyin “Zhongguo Renmin Yinhang” (without tones). The right front of the note includes a tangible depiction of the denomination in Chinese braille starting from the fourth series.

Second Series

On March 1, 1955, the second series of renminbi banknotes (the first having been issued for the earlier currency) was introduced. Each note include a title “People’s Bank of China” and the denomination on reverse side of the note is written in languages such as Uyghur, Tibetan, Mongolian and Zhuang ,( which has  appeared in each series of renminbi notes). The denominations available in second series banknotes were ¥0.01, ¥0.02, ¥0.05, ¥0.1, ¥0.2, ¥0.5, ¥1, ¥2, ¥3, ¥5 and ¥10.

Third series

On April 15, 1962, the third series of renminbi banknotes was introduced. For the subsequent two decades, the second and third series banknotes were used in tandem. The denominations included in this series were ¥0.1, ¥0.2, ¥0.5, ¥1, ¥2, ¥5 and ¥10. While in 1990’s the third series was phased out, it was recalled completely on July 1, 2000.

Fourth series

The fourth series was introduced in a phased manner between 1987 and 1997, even though the banknotes were dated 1980, 1990, or 1996. They are still considered as legal tender. Banknotes are presented in denominations of ¥0.1, ¥0.2, ¥0.5, ¥1, ¥2, ¥5, ¥10, ¥50 and ¥100.

Fifth series

In 1999, a fresh series of renminbi banknotes and coins was gradually introduced. The fifth series includes banknotes with denominations of ¥1, ¥5, ¥10, ¥20, ¥50 and ¥100. Notably, the fifth series depicts the portrait of Mao Zedong on all banknotes, instead of various leaders and workers which had been featured previously.

Commemorative designs

In 1999, in order to honor the 50th anniversary of the establishment of the People’s Republic of China, a commemorative red ¥50 note was issued. This note features Mao Zedong on the obverse and various animals on the reverse.

An orange polymer note, and thus far, China’s lone polymer note, commemorating the new millennium was issued in 2000 bearing a face value of ¥100. This note includes a dragon on the obverse and the reverse features the China Millennium monument (Center for cultural and scientific fairs).

Then in the 2008 Beijing Olympics, a green ¥10 note was issued which had a print of the Bird’s Nest on the front with the back depicting the image of a classical Olympic discus thrower and various other athletes.

Suggested future design

On March 13, 2006, some officials to an advisory body at the National People’s Congress suggested to include Sun Yat-sen and Deng Xiaoping on the renminbi banknotes. However, the proposal was not implemented.

International use

International trade

Prior to 2009, the Chinese renminbi had marginal to no exposure in the international markets because of stringent government controls. The Central Chinese government prohibited practically all forms of yuan holdings or transactions. Transactions between Chinese companies and a foreign entity were only allowed in US dollars. As Chinese companies could not hold US dollars and foreign companies unable to keep Chinese yuan, all transactions would get through the People’s Bank of China. Once the sum was deposited by the foreign party in dollars, the central bank would then pass the settlement in renminbi to the Chinese company.  Later in June 2009, the Chinese officials announced a new scheme where business and trade transactions were permitted between specific businesses in Guangdong and Shanghai municipalities and counterparties (only) based in Hong Kong, Macau, and select ASEAN nations. As this schemen met with resounding success, it was further extended to 20 Chinese provinces and counterparties internationally in July 2010, and in September 2011 it was announced that the remaining 11 Chinese provinces would be included.

In a move aimed at establishing the renminbi as an international reserve currency, China has entered in agreements with Russia, Vietnam, Thailand and Japan; consequently trade with those countries henceforth can be settled directly in renminbi instead of requiring conversion to US dollars.

International reserve currency

In july 2010, many restrictions concerning renminbi denominated bank deposits and financial products were significantly liberalized.  In 2010, Malaysia’s central bank purchased renminbi denominated bonds while world’s number one fast-food chain, McDonald’s had issued renmimbi denominated corporate bonds through Standard Chartered Bank of Hong Kong.

Foreign exchange liberalization has allowed the yuan to look more attractive as it can be held with higher return on investment yields, whereas earlier that yield was virtually none.

Nevertheless, a number of national banks such as Bank of Thailand (BOT) have expressed a grave concern about RMB held as reserve currency; this is because BOT cannot replace the depreciated US Dollars in the 200 billion dollar Foreign Exchange Reserves held by BOT with Renminbi Yuan to the degree that BOT wishes. The reasons being:

1. The Chinese Government is not ready yet with the full responsibilities and commitments on the economic affairs at the global levels.
2. Renminbi Yuan still has to turn into a well-liquidated (fully convertible) currency.
3. The Chinese government still short of profound and broad vision about how to execute fund-raising to handle international loans at global levels.

However, HSBC was of the view that Renminbi to become the third major reserve currency in few years down the line (The bank’s original estimation was by 2011).

Countries that have adopted left-leaning policies have also started to use the Renminbi as an alternative reserve currency to the United States dollar;

While Chile’s central bank reported in 2011 to have US$91 million worth of Renminbi in reserves, the president of the central bank of Venezuela, Nelson Merentes, made statements in support of the Renminbi following the announcement of reserve withdrawals from Europe and the United States.

Use as a currency outside mainland China

The two special administrative regions, Hong Kong and Macau, use their own official currencies, according to the “one country, two systems” principle and the basic laws of the two territories.  Thus, the Hong Kong dollar and the Macanese pataca continue to be the legal tenders in the two territories, and while renminbi, is sometimes accepted, it is not a legal tender. Banks in Hong Kong let people to keep accounts in RMB. Following some changes in legislation in July 2010, many banks around the world are now gradually offering individuals the chance to maintain deposits in Chinese renminbi.

The RMB was used in Macau even before the 1999 return to the People’s Republic of China from Portugal. Although banks in Macau can issue credit cards based on the renminbi, loans are not provided as yet. Renminbi based credit cards cannot be used in Macau’s casinos.

The Republic of China, which administers Taiwan, believes that extensive usage of the renminbi would create an underground economy and challenge its sovereignty.  However, tourists are allowed to carry up to 20,000 renminbi when visiting Taiwan. These renminbi must be converted to the New Taiwan dollar at trial exchange sites in Matsu and Kinmen.

The Chen Shui-bian administration maintained that it would not allow full convertibility until the mainland China signs a mutual foreign exchange settlement agreement, although President Ma Ying-jeou has assured to allow full convertibility as soon as possible.

The renminbi is also circulated in some of China’s neighbors, such as Pakistan, Mongolia and northern part of Thailand. Where Cambodia allows the renminbi to be used as an official currency, Laos and Myanmar allow its usage in border provinces.  In Vietnam, although renminbi is unofficial, it still allows the exchange of renminbi to local currency dong.

April 2011: In Hong Kong, the Chinese property investment trust, Hui Xian successfully raised Rmb10.48 billion ($1.6 billion) in the first Initial Public Offering with denomination in Renminbi. Beijing has allowed renminbi-denominated financial markets to widen in Hong Kong since the central Chinese government wants to increase the usage of renminbi in global market and thus reduce the use of the US dollar.

From 2007 onwards, RMB-nominated bonds are also issued outside the Mainland China; these are called “dim sum bonds”.

For most part its past history, the RMB was pegged to the U.S. dollar at 2.46 yuan per USD (during the 1970s, it was, though appreciated until it touched 1.50 yuan per USD in 1980). Ever since China’s economy opened in phased manner from the early 1980s, the RMB was devalued in order to boost the competitiveness of Chinese exports. Consequently, the official USD to RMB exchange rate fell from 1.50 yuan in 1980 to 8.62 yuan by 1994 (lowest ever  exchange rate on the record).  Cheaper commodities from China increased the demand for its products and thus improved its current account balance during the latter half of the 1990s, enabling the Chinese government to keep a peg of 8.27 yuan per USD from 1997 to 2005.

In August 30, 2011, yuan’s exchange rate vis-à-vis against the US dollar stood at 6.38, its highest official level since a currency revaluation in 2005.  China’s leaders were prompted to revalue the yuan to tame inflation – a shift in exchange rate regime which U.S. officials have urged for years to help repair the massive trade deficit with China.

Depegged from the U.S. dollar

On July 21, 2005, the currency peg to dollar was finally ended, which saw an instant one-off RMB revaluation to 8.11 per USD.  The renminbi’s  exchange rate against the euro was at at 10.07060 yuan per euro then.

However the peg was discontinued when the financial crisis of 2008 hit the global markets. While under intense pressure from Washington, China took some steps to allow its currency to strengthen for three successive years starting in July 2005, but yet again it re-pegged its currency to the dollar as the financial crisis deepened in July 2008.

Then under immense pressure from Washington, on June 19, 2010, the People’s Bank of China released a statement concurrently in Chinese and English indicating that they would “proceed further with reform of the RMB exchange rate regime and increase the RMB exchange rate flexibility.”

The news was welcomed by world leaders such as Barack Obama, Nicolas Sarkozy and Stephen Harper.  However, The PBoC also maintained there would be no “large swings” in the currency. The RMB hit its highest level in five years and markets worldwide peaked on Monday, June 21 following China’s announcement.

China has replaced some of their dollar reserves accounts to accounts in their competitor nations thus pushing the exchange rate of domestic currencies relative to dollar, this in turn has led these nations to invest in dollars to keep their own currencies down.

Managed float

The RMB is now adopting a managed floating exchange rate based on market supply and demand with reference to a basket of foreign currencies. According to this exchange rate system, the daily trading price of the U.S. dollar relative to RMB in the inter-bank foreign exchange market would be allowed to float within a narrow range of 0.3% around the central parity published by the People’s Bank of China (PBC); subsequently on May 18, 2007, this range was extended to 0.5%.

China has stated its currency basket is dominated by the United States dollar, Euro, Japanse yen and South Korean won, even as remaining small proportion include the British pound, Thai baht, Russian ruble, Australian dollar, Canadian dollar and Singapore dollar.

On April 10, 2008, the yuan traded at 6.992 per US dollar, which was the first time in more than ten years when a dollar was exchanged for less than seven yuan and at 11.03630 yuan per euro.

Starting in January 2010, Chinese and non-Chinese citizens were allowed to have an annual exchange limit of a maximum of 50,000 USD. Exchange procedure will only progress if the applicant appears in person at the relevant bank and shows his passport or his Chinese ID; the information provided is being centrally registered. The maximum amount which can be withdrawn is 10,000 USD per day, while the maximum purchase limit of USD is 500 per day. This strict management of the currency has resulted in bottled-up demand for exchange in both directions. The current method is viewed as a major tool to keep the currency peg, keeping a check on inflows of ‘hot money’.

A policy shift of China which led to shifting of their dollar reserves into the currencies of their other trading partners has forced these nations to shift more of their reserves into dollars; consequently it has resulted in zero sum game, that is, no big change in the value of the Renminbi relative to the dollar.

Futures market

Renminbi futures are traded at the Chicago Mercantile Exchange and these futures are cash-settled at the exchange rate published by the People’s Bank of China.

Purchasing power parity

According to many economists, it is very apparent that the yuan is undervalued on the basis of purchasing power parity analysis. One recent study points out that the yuan is 37.5% undervalued.

• In 2004, The World Bank estimated that, by purchasing power parity, one International dollar was equivalent to roughly RMB1.9.
• In its recent study, the International Monetary Fund estimated that, by purchasing power parity, one United States dollar was equivalent to approximately RMB3.462 in 2006, RMB3.621 in 2007, RMB3.798 in 2008, RMB3.872 in 2009, and RMB3.922 in 2010.

Chinese RMB official exchange rate statics