Why is Chinese Currency Not Traded in Forex?


The Chinese yuan is not traded in foreign exchange markets. Recently, we have been receiving numerous inquiries from our readers whether or not the yuan could offer a very good investment opportunity in forex.

January 29, 2021 | AtoZ MarketsThe Chinese economy ranks as the world's second-largest in terms of gross domestic product (GDP), but it is the largest when measured by purchasing power parity (PPP). With more than 1.4 billion residents, China accounts for 9.3% of global GDP and is the largest exporter in the world.

The country's leading industries are machinery, apparel, furniture and textiles. Its biggest export partners are the US, Japan and South Korea.

Due to a trade war between the US and China, the Yuan currency showed ups and downs in the last few years.

What is the Chinese Currency?

Renminbi (RMB) is the official name of the currency of China, which is often referred to as Yuan, though both terms are used interchangeably.

Both the Renminbi and the Yuan are official names for the currency of the People's Republic of China. The word Renminbi signifies people's money in Chinese language, and its international symbol is CNY.

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On the other hand, the yuan is a unit of measurement used in Renminbi transactions, but also refers to Chinese currency generally.

The currency of the People's Republic of China is known as the yuan. Yuan comes in bills and coins. The highest-valued bill is ¥100, followed by ¥50, ¥20, ¥10 and ¥5 bills.

The lowest-valued coin is ¥1; other denominations include ¥2 and ¥5 coins. All yuan bills feature a portrait of Mao Zedong on one side; each denomination has its own color and a landscape image on the other side of the bill.

Why is Chinese Currency Not Traded in Forex

The Chinese government is working to launch a digital yuan. Known officially as the Digital Currency Electronic Payment (DC/EP), the digital yuan is currently not available for trading, as it is being trialed in major cities in China.

What is the difference between CNY and CNH?

You might be wondering what all these different currencies are and why there are so many. As it turns out, there are actually three Chinese currencies in circulation today: the yuan (CNY), the renminbi (RMB) and CNH, an unofficial offshore form of yuan trading.

Though they share some similarities, each currency has its own particular rules and regulations. For example:

CNY is used for domestic transactions in mainland China, while RMB is used for international trade. However, because CNY can only be used domestically and not internationally, those who need to use RMB abroad must first convert it into CNH using their bank account or credit card. This means that you may want to hold onto your cash until you arrive at your destination before exchanging it into your desired currency and this will vary depending on where you're going.

The Chinese government prints two types of paper money, both technically called yuan, which can lead to some confusion.

The first type is the official currency of mainland China and is most commonly referred to as the renminbi (RMB). The second type is also known as offshore yuan or CNH and does not have legal tender status in mainland China. However, it may be used for transactions in Hong Kong or Macau SARs and certain international financial centers (such as London).

The first, CNY, is legal tender only in mainland China. Outside China, people will refer to this currency as RMB. The second, CNH, is a tradable version that the government allows to circulate outside mainland China. It stands for "offshore yuan."

The difference between CNY and CNH has to do with how each is used. For example:

  • A bank may have both types of currency accounts, for example, you could have one account in RMB and another in CNH at the same bank; they're just labeled differently because they can be used differently (for different purposes).
  • You can trade one type of account for another if you want—for example, exchanging your USD account for AUD account or vice versa, but it's not necessary; these accounts are separate from each other and don't affect each other at all (except when you transfer money between them).

That said, what is the place of the Yuan in Forex?

Why is Chinese Currency NOT Traded in Forex Market?

The Chinese currency is the world’s second largest economy, but it is not traded in Forex market. China has the largest share of foreign exchange reserves in the world and also one of the largest economies in Asia. China has been trying to promote its currency as an alternative to US dollar for a long time now because they believe that their currency could replace U.S dollar as an international currency.

China had launched CNY/USD OTC market back in 2010 but this did not succeed much because there was no demand for it from either side (Chinese or Foreign Investors) due to lack of trust & transparency. This led to only few transactions happening over here each day which subsequently died down by end-2014 due to low liquidity issues faced by participants on both ends i.e., buyers & sellers who wanted to trade this product domestically; plus limited number of counterparties willing enough to undertake such activity against their own choice!

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Should You Invest in the Chinese Currency Market by Trading in Forex?

The Yuan has been allowed to trade, but it should be noted that there is a higher level of volatility and risk associated with it compared to other currencies. In particular, the People's Bank of China has intervened in its development because of the unstable global economic climate.

As previously noted, the People's Bank of China retains control of capital and often intervenes in the markets to influence the prices of the USD/CNH and the EUR/CNH. These interventions make trading the yuan on Forex riskier, but there also exist greater opportunities for traders looking for volatility.

If the Chinese government finally decides to open its currency to speculation and initiate a revaluation movement in the Yuan, this could be an excellent opportunity to invest in the foreign exchange market.

China has developed strong relationships with some of its other trading partners that could underpin the yuan against the national currencies of those countries.

For short-term traders, however, it is still possible to trade the Chinese Yuan on the Forex and profit from the currency's fluctuations.

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Conclusion

The Chinese currency is an interesting choice for many Forex traders, especially considering the volatility in the USD/CNH. The Yuan, however, is not one of the Forex market's most popular currencies because of the People's Bank of China. Until the People's Bank of China allows the currency's value to be determined by the free market, it is unlikely that Chinese currency will trade freely in Forex markets.

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