Why is Chinese Currency not traded in Forex? Recently, we have been receiving numerous inquiries from our readers whether Yuan could offer a very good investment opportunity in Forex.
January 29, 2021 | AtoZ Markets – China is the world’s second-largest economy in terms of GDP, but it ranks as the largest economy in terms of purchasing power parity (PPP). With a population of around 1.4 billion in 2019, China makes up 9.3% of global GDP and is the world’s largest exporter.
Its leading industries are machinery, apparel, furniture, textiles, and integrated circuits. Its biggest export partners are the United States, Hong Kong, Japan, and South Korea.
As a hotbed of international imports and exports, China’s currency, the yuan, experienced its highest volatility in history over the past two years, due to a trade war with the United States.
If you’re interested in trading the Chinese currency, we’ll explain the ins and outs of trading the Yuan, including what the Chinese currency is in this article.
What is the Chinese currency?
The Chinese currency is called Renminbi but is often referred to as the Yuan. So if both terms are used interchangeably, what is the difference between the Yuan and Renminbi?
The terms Renminbi and Yuan is akin to that of the sterling and the pound in the UK. The Renminbi is the official currency of the People’s Republic of China, and it means “people’s money.” Its international symbol is CNY (or CNH in Hong Kong; but abbreviated RMB, with the symbol ¥).
On the other hand, the yuan is the name of the unit in which Renminbi transactions are denominated, but also refers to the currency generally.
The yuan comes in ¥1, ¥2, ¥5, ¥10, ¥20, ¥50, ¥100 bills, and ¥1 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.
It is important to mention that the Chinese government is looking 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 currently been trialed in major cities in China.
CNY and CNH currency – what’s the difference?
Is there any difference between CNY currency and CNH currency? Yes! The Yuan, which is sometimes denoted as “RMB” is traded onshore and offshore, with capital controls preventing the Chinese currency from going offshore. With this in mind, the Chinese currency has two different exchange rates depending on the place of negotiation:
- If the Renminbi is listed onshore, it has the abbreviation “CNY”.
- If the Renminbi is listed offshore, it has the abbreviation “CNH”.
The CNY Yuan and the CNH Yuan, therefore, both refer to the same (and only) Chinese currency, with the abbreviation changing depending on whether the negotiation is done onshore or offshore.
Additionally, the Renminbi on the stock market is distinguished according to whether it is CNY onshore or CNH offshore. Indeed, they represent two distinct markets.
- The CNY exchange rate against the dollar has the characteristic of being fixed by the People’s Bank of China, with the CNY market being animated by exporters who buy RMB against foreign currencies.
- The CNH exchange rate is determined by the law of supply and demand of the CNH. This market has a shorter history but has been growing very rapidly since its creation in 2010. The CNH market is generally animated by actors who have a goal other than commercial and personal, such as investment, speculation, or hedging, where these activities are very limited on the CNY.
That said, what is the place of the Yuan in Forex?
Why is Chinese currency not traded in Forex?
The Chinese currency is not traded in Forex because the Dollar-Yuan pair is still considered to be exotic. USD/CNY is the eighth most traded currency pair and the most popular CNY pair. The trading volumes of the pair are yet to measure up to the levels of the major Forex pairs like the USD/JPY or the EUR/JPY.
One of the reasons for this is clearly the intervention of the People’s Bank of China, which still refuses to leave its currency entirely in the hands of the markets, maintaining an undervaluation of the Yuan against the Dollar.
It is worthy of note that before 2008, the Renminbi followed a quasi-fixed exchange rate regime imposed by the People’s Bank of China. However, the 2008 crisis then changed things somewhat and allowed the Yuan to play a bigger role in the Forex market. Since then, China has made several efforts to make its currency more open to the international market.
However, due to its undervaluation and the still fairly substantial control of the Bank of China, the Forex Dollar/Yuan pair is not a pair of choice among Forex traders, despite the economic power of China.
China’s currency against the Dollar is not very attractive to trade in view of many investors. To solve this problem, the People’s Bank of China will have to revalue the Yuan and lets it move freely in the currency market.
Yield better returns by trading Chinese currency in Forex
While the Yuan currency allows trading, but it should be noted that it presents volatility and risks that are higher than the average, in particular, because of the interventionism of the People’s Bank of China.
Indeed, as noted above, 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 the Renminbi therefore also presents better opportunities for traders looking for volatility.
In addition, if the People’s Bank of China finally decides to open its currency to speculation and that a revaluation movement in the Yuan is initiated, this could offer a very good investment opportunity in Forex.
China has developed strong relationships with some of its other trading partners, such as Australia, Hong Kong, South Korea, and Germany that could underpin the yuan in the near future against the national currencies of those countries.
In the meantime, however, it remains possible and interesting to trade the Yuan on the Forex in the short term via reliable Forex brokers, and take advantage of the short term fluctuations for experienced traders.
Trading Chinese yuan in Forex- Conclusion
The Chinese currency can be an interesting choice for many Forex traders, especially considering the volatility in the USD/CNH currency pair.
However, the Yuan is a long way from being one of the Forex market’s most popular currencies, largely due to the influence the People’s Bank of China has on its price.
Until the People’s Bank of China allows the currency’s value to be determined by the free market, in which case it will provide more opportunities for speculators, the Chinese currency will not be traded in Forex in the near future.
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