Currency is the most important part of the whole financial system, and it is not exaggerating to say that talking about currency can be complex.
Of all currencies, the Renminbi (or Yuan) may be one of the most important currencies in the global financial system (aside from the USD).
In this post, let's learn about 5 important, yet less-known facts about the Renminbi that you may not know!
Fact #1: Renminbi is a managed-float currency
Unlike the USD which is a free-float currency (ie. its value depends solely on supply and demand), the onshore Renminbi exchange rate is considered a managed-float currency.
Essentially, what this means is that the extent of how the Renminbi moves in the market is partially managed by the Chinese authority.
This is done by applying a mechanism called Yuan Mid-Point Fixing:
Under the Yuan Mid-Point Fixing mechanism, the Dollar/Renminbi is allowed to trade 2% on either side of the fixed mid-point every day.
How is the mid-point being determined? The midpoint is calculated by the China Foreign Exchange Trade System (CFETS), a unit overseen by the People's Bank of China before the onshore market opening at 09:30 a.m.
To get the mid-point, the CFETS seeks quotes from a panel of 14 market-making banks and produces the fix based on their input.
Meanwhile, the banks will refer to the onshore Reminbi closing price from the previous day, overnight dollar movements or shifts in currency baskets such as the CFETS renminbi index, and supply-demand conditions in the market before submitting a number to CFETS.
How does managed-floating work on Renminbi?
In August 2023, to support a weakening Renminbi, the Chinese authority intervened by persistently setting stronger-than-expected midpoint fixing.
Fact #2: The Renminbi was pegged twice against the USD in 1994 and 2008
1994 was the year when the unification of China's dual exchange rate system into a single exchange rate regime happened. This led to the adoption of a fixed dollar peg for the next 10 years (June 1995 – June 2005), which moved on to the managed-float era after June 2005.
2008 was the next time the Renminbi was re-pegged to the USD (July 2008 - June 2010) due to the Global Financial Crisis.
Fact #3: Devaluation of Renminbi in 2015
2015 is probably one of the most important years for the Renminbi. After a decade of economic growth in the 2000s, leading to the appreciation of Renminbi, the Chinese authority decided to devalue their currency.
Why such a decision?
An appreciation in the Renminbi will reduce the competitiveness of China's exports. Since China's economy is highly dependent on exporting, there are worries that an appreciation in Renminbi could lead to lower growth and problems like increasing unemployment.
In 2015, China went through 3 consecutive devaluations of the Renminbi, indicating its intent to reform towards a more ‘market-oriented’ economy.
The impact of the Renminbi's devaluation is big.
Some of the impacts include:
Increased competitiveness of Chinese goods relative to other countries.
Strengthening of China's manufacturing sector, which helps boost growth.
Rising Dollar. A drop in the Renminbi's value also means a relative rise in the value of USD which increases the purchasing power of US consumers, leading to an increase in import spending from the US.
Drop in US exports since US products become relatively more expensive.
Fact #4: The Renminbi was given the status of a reserve currency in 2016 by the IMF
The devaluation of the Renminbi in 2015 was also intended by China to be included in the International Monetary Fund's (IMF) special drawing rights (SDR) basket of reserve currencies, alongside currencies like the USD, Euro, Japanese Yen, and British Pound.
What's an SDR?
The SDR is an international reserve asset that allows IMF members to purchase domestic currency in foreign exchange markets to maintain their exchange rates. The IMF reevaluates the currency composition of its SDR basket every five years.
While the Renminbi was rejected in 2010 on the basis that it was not freely usable, the IMF took the devaluation move in 2015 positively (claiming that it was done in the name of market-oriented reforms). As a result, the Renminbi became part of the SDR in 2016.
The impact of the Renminbi getting the status of a reserve currency:
Since the rate of borrowing funds from the IMF depends on the interest rate of the SDR, the cost of borrowing would be hinged partly on China's interest rates.
Fact #5: High correlation between the Renminbi and the Malaysian Ringgit (MYR)
Since gaining the status of a reserve currency, the Renminbi has been gaining a positive correlation (r) with the Malaysian Ringgit (MYR):
In 2023, as China is going against the global trend by cutting instead of raising rates, leading to the weakening of its currency, the MYR is one of the key Asian currencies that are being dragged along by China's decision. Take a look at MYR's correlation with the Renminbi for both 2022 and 2023 below (3rd from the right):
The strong correlation between the Renminbi and MYR is likely due to the extensive trade links between China and Malaysia. The value of trade between Malaysia and China in 2022 was about 17.1% of Malaysia’s total global trade at RM2.8 trillion, which explains the influence of the Renminbi's movement over the MYR.
Verdict: Learn and take advantage of the opportunities that Renminbi futures bring to the table!
For traders and investors looking to gain exposure to the Renminbi, the Renminbi (USD/CNH) futures can be a solid choice.
Click HERE to learn more about Renminbi futures.
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Disclaimers
Any of the information above is produced with my own best effort and research.
This post is produced purely for sharing purposes and should not be taken as a buy/sell recommendation. Past return is not indicative of future performance. Please seek advice from a licensed financial planner before making any financial decisions.
Leverage is a financial tool that comes with its advantages and risks. Please learn and understand both the upsides and downsides of leverage before using it for trading.
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