China is the goose that laid a golden egg. Everyone wants a piece of it.
With the second-largest GDP in the world and a booming economy, global businesses are flooding China to harness the enormous trade opportunities.
However, a surprising amount of global merchants aren’t aware that China has two currencies.
This article will explain in detail the difference between currencies, why there is a need for them and what the advantages are for companies wishing to do business in China.
This article at a glance
While most countries have a single currency, China has two currencies — CNH and CNY. Where the former caters exclusively to mainland China, the latter is primed for international trade.
A brief history of China’s currency
The People’s Bank of China introduced the renminbi and yuan in 1948, with each term referring to a different part of the Chinese monetary system. While the two are often used interchangeably, the renminbi is the official currency of China and refers to the value of the Chinese currency while the yuan is the unit of account and is used to denote the amount of money being exchanged.
Prior to the Chinese economy becoming one of the world’s leading industrial and economic powers, its currency was relatively closed off from international exchange and tightly regulated by the government. This was done to ensure that the amount of money and capital flowing out of the country was restricted and the government had better control over the economy.
This regulation created an environment where the Chinese currency was not as widely available internationally, and the exchange rate of the yuan to the US dollar and other global currencies was not particularly advantageous. Exchange rate controls were put in place to minimize volatility in the currency, and the government has liberalized the exchange rate in recent years, resulting in the yuan becoming more accessible to international markets.
What are renminbi and yuan?
China’s official currency is called Renminbi — it’s also known as the “people's currency”. In mainland China, it’s officially called the Chinese yuan renminbi (CNY).
Simply put, CNY is used for the domestic market while CNH is used for international trade and payment.
Both currencies are valued at the same amount with the exchange rates set at a ratio of 1:1.
The renminbi (RMB)
The Renminbi (RMB) is the official currency of the People’s Republic of China. It was first introduced in 1948 when the Chinese Communist Party established their new government after the Chinese Civil War. The RMB was a key part of the new government’s efforts to unify the economy and distinguish itself from the previous administrations, which suffered from hyperinflation.
In 1955, the RMB was revalued, meaning that each new yuan was equal to 10,000 units of the old yuan currency. This revaluation was essential in stabilising the economy and encouraging economic growth in the country. The RMB has since become one of the most traded currencies in the world, with its value held in major reserve banks and investment funds across the globe.
The Yuan (CNY)
The yuan is the official currency of China, first introduced to the nation centuries ago by foreign merchants. It was developed as an exchange for local silk and porcelain goods, which the Chinese merchants preferred to be paid in silver coins. Over time, as different countries began to mint their own coins and notes, the Chinese followed suit and issued their own currency called the yuan. Today, the most commonly used yuan note is the 100 yuan, although 50, 20, 5, and 1 yuan notes are also in circulation. The yuan is used in all aspects of Chinese life and is one of the most widely accepted international currencies.
Why does China need two currencies?
When China developed into an industrial powerhouse in the early 1990s, western investors flooded the Chinese market with capital. Business transactions had to be seamless.
To ease the process, China’s banks decided to trade the CNH currency in 2004.
The Chinese economy relies on its two currency system to regulate the exchange rate of its money and maintain control over foreign investments. The Chinese Renminbi (RMB) is used for domestic transactions within Mainland China, whereas the Chinese Yuan (CNY) is used for international transactions outside the mainland. This dual-currency system plays a key role in keeping the People’s Bank of China from running into economic trouble due to foreign investors seeking a larger portion of the market.
In this way, the CNY limits how much exposure Chinese businesses have with foreign capital investments. This keeps outside companies from manipulating prices while they manage their own currency. Additionally, by limiting these external investment opportunities, it allows Chinese buyers to accept preference towards their own companies — a vital caveat critical to maintaining growth in trade and commerce domestically as opposed to abroad.
The dual-currency system also helps regulate funds for various projects, as it minimises total risk posed by large swings in any one particular currency. In essence, it prevents economic instability from collapsing markets in times of crisis or trepidation. This leads to more stability regarding import/export taxes, currency exchanges and ensures there are enough resources available both at home and abroad regardless of whichever currency an investor may decide to use. In combination with other monetary policies maintained by the People’s Bank of China, this two-currency system provides sufficient regulation overgrowth in specific sectors of the economy while cashing out on potential profits overseas.
What are the key differences between CNH and CNY?
Even though CNH and CNY share certain similarities, they’re not the same. China is ruled by an authoritarian government that tightly monitors and controls its citizens. The nation’s currency is no different. The value of CNY is controlled by the People’s Bank of China, which only allows it to fluctuate within a 2% range of the reference rate. Only China’s residents have access to the CNY market. CNH is used solely for the purpose of international trade. As a result, there are different regulations and restrictions imposed upon these currencies and their usage.
Example:
Nexus Ltd is a medicinal company based in London that trades regularly in mainland China. For a smoother business transaction in China, Nexus pays its suppliers in CNH.
How does trading in CNH benefit your business?
The renminbi is fast becoming a globally accepted currency. This is good news for businesses located outside China because it makes it easier for them to enter China’s massive market and facilitate transactions, including sending money to China.
Let’s look at the benefits when trading in CNH.
Firstly, CNH offers traders exposure to the Chinese economy. As one of the biggest and most influential economies on earth, China’s growth is set to continue for at least another decade or more. This presents traders with an opportunity to benefit from this expansion as they invest in CNH. In addition, traders can gain diversification within their portfolios by investing in CNH due to its being uncorrelated with other currencies such as the US Dollar or Euro.
Secondly, CNH offers low transaction costs when compared to most other currencies meaning those who trade using it can save money when buying or selling assets denominated in it.
Thirdly, CNH provides greater liquidity due to increased trading volumes on international markets which means that investors do not have to worry about volatile exchange rates as much as they would with smaller less liquid traded currencies. Finally, traders who purchase assets denominated in CNH stand to benefit from long-term capital appreciation since China’s currency is expected to appreciate over time against other major global currencies due its expanding economy.
Overall, investors can gain a wide range of advantages from trading in CNH which makes it a very attractive proposition for all financial institutions and individual traders alike. The fact that it is relatively new makes it even more enticing for those looking for an alternative investment avenue outside of traditional assets like stocks and bonds. So whether you’re an institutional investor looking for additional diversification or an individual trader seeking short-term profits from movements within the Chinese economy, investing in CNH could be exactly what you need!
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FAQ about currency in China
What currency does China use?
China uses the currency known as the Chinese yuan (CNY) or renminbi (RMB). The terms yuan and renminbi are often used interchangeably, with renminbi referring to the official currency and yuan representing the primary unit of the currency.
What is China’s main currency?
China’s main currency is the Chinese yuan (CNY) or renminbi (RMB). The renminbi is issued and regulated by the People’s Bank of China, which is the country’s central bank.
Does China have its own currency?
Yes, China has its own currency, which is the Chinese yuan (CNY) or renminbi (RMB). The renminbi is the official currency of the People’s Republic of China and is used as legal tender throughout the country.
