Home Banking The A to Z of renminbi in the world economy

The A to Z of renminbi in the world economy

by internationalbanker

Being the official currency of China, the renminbi is considered legal tender around the country except in Macau, Hong Kong, and Taiwan although there are establishments in Hong Kong and Macau that accept the currency. In fact, there are banks in Hong Kong which offer renminbi accounts. Prior to 2005, the renminbi’s value was based on the US dollar. However, when China began participating actively in international trade, it devalued the renminbi to increase its global competitiveness. Today, the renminbi has appreciated due to efforts by the Chinese authorities and the stimulus programs implemented by various central banks around the world.

The difference between the yuan and the renminbi 

Most people use renminbi and yuan interchangeably. Although according to forex experts, renminbi is the formal name and yuan is a unit of the renminbi. It can be likened to the United Kingdom’s sterling pound. Sterling is the formal name while the pound is the unit of currency. When buying a thing, the price is always quoted in yuan and not in renminbi.

How the Chinese currency came into existence 

China’s first emperor by the name of Qin Shi Huang introduced the Qin as the uniform currency in the country in 210 BC. The copper coin, although round in shape, had a square hole in the middle. This became the primary currency until the introduction of the yuan towards the end of the nineteenth century.

Today, the production of the yuan is carried out by the China Banknote Printing and Minting which is headquartered in Beijing. The banknotes are printed in Nanchang, Shijiazhuang, Xi’an, Chengdu, Shanghai, and Beijing while the coins are minted in Shenyang, Shanghai, and Nanjing.

The use of the renminbi in international trade

Prior to 2009, the renminbi was only used domestically. International trade was in US dollars and had to be coursed through the People’s Bank of China. The bank accepted the US dollars on behalf of the Chinese manufacturing companies and gave the equivalent amount in renminbi to these companies. By the middle of 2009, Chinese authorities allowed international transactions in Guangdong and Shanghai to be consummated in renminbi instead of in US dollars. However, the transactions are only limited to countries of the ASEAN as well as to territories like Macau and Hong Kong. By September 2011, the renminbi was widely used for international trade in all provinces in China.

In most cases, trading using the renminbi can have its advantages. The US dollar had been used historically as the currency for international transactions. Companies in the US believe that using the US dollar can shield them against forex volatility. However, these firms are often at a disadvantage when pitted against companies which trade using the local currency. International companies which use the renminbi in their trade transactions often save up to 3% in administrative costs attributed to embedded premiums when they transact using the US dollar.

However, the renminbi can only be used in trade transactions by Chinese firms which are licensed to export and import goods. It can’t be used by individuals in their international transactions. For individual transactions, the US dollar is still the currency to be used.

The use of the renminbi as an international reserve currency 

In 2010, the world witnessed the liberalization of financial products and bank deposits involving the renminbi. Even the Central Bank of Malaysia purchased bonds in renminbi. McDonalds even offered renminbi-denominated bonds through Hong Kong’s Standard Chartered Bank. Because of such moves, the renminbi became lucrative and offered higher yields to investments. However, some central banks are still apprehensive about the renminbi because the Chinese government hasn’t fully committed and taken responsibility on global economic affairs. Furthermore, the renminbi isn’t fully convertible yet. Lastly, the Chinese authorities aren’t very experienced when it comes to the fundraising of global loans, although left-leaning countries like Chile and Venezuela had already turned to renminbi as their international currency reserve.

Issues concerning the value of the renminbi

Before the Chinese government opened its country to international trade, the value of the renminbi was based on the US dollar. During the 1980s, the renminbi was devalued so that the price of Chinese exports remained competitive when China started opening the country to international transactions. Between 1997 and 2005, the yuan maintained an exchange rate of 8.27 to the US dollar because of the improvement in China’s current account balance. At present, the Chinese government is believed to be appreciating the yuan’s value to curb inflation.

The United States of America, as well as other countries around the world, have accused China of manipulating the value of the yuan to give unfair advantage to China’s exports. This means that the price of an export product is relatively cheaper than the other export products around the world. As a result, more and more companies from different countries import goods from China. On the other hand, China imports become more expensive because more yuans are required to purchase the imported products. This means that China imports less products from other countries and relies on locally produced items.

The yuan had already increased in value by 34% against the US dollar on a nominal basis and by 42% on the real basis from mid-2005 to mid-2013. Proof of this is the huge decline in China’s current account surplus and the slowdown in forex reserves accumulation. Therefore, analysts believe that the yuan isn’t as undervalued as the US claims it to be.

The value of the renminbi has its advantages and disadvantages to the other countries. Because of a low-value yuan, other countries can purchase parts and components from China at very low prices thus providing the necessary benefits to their manufacturing firms and consumers. However, the exports of these countries are greatly affected because the manufacturing firms can’t compete with China’s manufacturing firms. Because China controls the value of the renminbi, this enables them to keep a large inventory of foreign reserves, particularly the US dollar which is the used to purchase US Treasury Bills. These government bonds are then used to keep interest low and fund budget deficits.

Countries are pushing China not to manipulate its currency and allow the market to dictate the value of the yuan. In doing this, it should also reduce its dependence on fixed investments and exports, and boost local consumption by increasing imports. Analysts believe that a future global economic crisis will be averted if China cooperates.

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