Chinese currency : Yuan, RMB, CNH, CNY
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What are the differences between the yuan, RMB, CNH and CNY?
It's difficult for traders to find their way around them.What is the real Chinese money/currency?
Officially, the Chinese currency is called the renminbi.Its Latin symbol is ¥.
The "yuan" (元/圆 or ¥) is only a unit of account.
The renminbi, also called "RMB", is therefore the name of the Chinese currency traded onshore and offshore. China retains control of capital, which prevents currency from flowing abroad and vice versa.
The renmimbi is therefore a single currency, but traded at two different exchange rates, depending on where it is traded:
If the RMB is quoted onshore, it is called "Chinese Yuan" and its abbreviation/symbol is "CNY".
If the RMB is quoted offshore, it is also called "Chinese Yuan" but its abbreviation/symbol is "CNH".
As China sought to increase the role of its currency on the world stage, exchange rate reforms led to the formation of the "CNH"currency. The CNH market is still relatively weak and illiquid, especially when compared to the euro/dollar market, but it is growing rapidly as restrictions in this market are gradually being lifted.
Currently, the onshore CNY and the offshore CNH are two distinct markets.
In addition to the technical differences, CNY's main characteristic is that its exchange rate with the US dollar is fixed by the Chinese central bank.
CNY’s market participants are generally onshore exporters, who require yuan CNY and sell US dollars. The PBoC ("People's Bank of China") also buys US dollars to fix its monetary policy and the exchange rate of the USD/CNY pair.
Unlike the CNY, the CNH exchange rate is determined by CNH's private supply and demand, although the CNH supply is suppressed by Chinese government regulation. The result is that demand for CNH (e.g. by speculators anticipating an increase in the value of the Chinese currency) is generally higher than supply. It is therefore common to see the CNH trading above the value of the CNY.
As both CNH and CNY represent the RMB but are listed on two separate markets, it is normal to see the same price movements on currency pairs such as USD/CNH and USD/CNY.
USD/CNH
USD/CNH pair flowchart
USD/CNY
USD/CNY pair flowchart
It should be noted that CNH/CNY quotes are not really processable. This currency pair is always at parity (1.0000).
CNH/CNY
CNH/CNY pair flowchart
I can already see some traders’ eyes twinkling. If we know that the CNH/CNY pair will always be more or less at parity, why not arbitrate it?
Dealing in the CNH/CNY pair is not really feasible.I don't think many brokers offer it; and the spread would make it untradeable.
On the other hand, going through USD/CNH and USD/CNY, why not!
If you know that CNH/CNY will always tend to return to parity, but that currently the pair CNH/CNY scores at 0.99.What can you do to arbitrate it?
Answer: it is difficult to know if it is the CNH that is overvalued in relation to the CNY, or if it is the CNY that is undervalued in relation to the CNH. Simply put, you look at the USD/CNH and USD/CNY pairs, then buy the cheapest pair and sell the most expensive pair. As soon as the two pairs are quoted at the same price, the pair CNH/CNY has returned to parity.
NB: It has happened that the CNH/CNY pair separated from parity further than expected.
- The first time was before the collapse of Lehman Brothers in August 2008.Tensions in the CNH market (a sudden drop in demand) led to an overvaluation of the USD/CNH pair, which was then perceived as an indication of USD/CNY (which would be set higher by the PBoC in response to financial market turmoil).
- The second time when the European debt crisis worsened. Fears of a negative impact on Chinese exporters due to a sudden drop in demand from Europe led Chinese officials to indicate that the USD/CNY exchange rate would be kept relatively stable.This predicted a higher fixing of the USD/CNY pair and consequently lower demand for CNH, the USD/CNH pair then traded at higher levels than the USD/CNY pair.
Two developments indicate that the CNH market will grow over time and become bigger for exporters, importers and investors.
- China aims to expand the international role of the CNH market by allowing foreign companies to issue CNH denominated bonds. For example, during 2010, the first "Dim Sum” bonds were issued by McDonalds, Caterpillar, China Development Bank, and some Hong Kong companies.
- The CNH will strengthen its expansion by reducing the capital controls that currently impede the flow of CNH.
The CNY market is expected to benefit from the huge volumes of Forex trading.EUR/CNY, USD/CNY pairs should soon appear as major currency pairs (comparable with the EUR/JPY and USD/JPY pairs). It is still to be seen whether the Chinese government will leave the CNY in the hands of the stakeholders. Nothing is less certain. Worse than the FED, or the ECB, the PBoC must monitor its currency stringently, even if it finally becomes open to speculation.
It's difficult for traders to find their way around them.What is the real Chinese money/currency?
The renminbi:RMB
Officially, the Chinese currency is called the renminbi.Its Latin symbol is ¥.
The "yuan" (元/圆 or ¥) is only a unit of account.
The renminbi, also called "RMB", is therefore the name of the Chinese currency traded onshore and offshore. China retains control of capital, which prevents currency from flowing abroad and vice versa.
The renmimbi is therefore a single currency, but traded at two different exchange rates, depending on where it is traded:
If the RMB is quoted onshore, it is called "Chinese Yuan" and its abbreviation/symbol is "CNY".
If the RMB is quoted offshore, it is also called "Chinese Yuan" but its abbreviation/symbol is "CNH".
As China sought to increase the role of its currency on the world stage, exchange rate reforms led to the formation of the "CNH"currency. The CNH market is still relatively weak and illiquid, especially when compared to the euro/dollar market, but it is growing rapidly as restrictions in this market are gradually being lifted.
Difference between Yuan CNY and Yuan CNH
Currently, the onshore CNY and the offshore CNH are two distinct markets.
In addition to the technical differences, CNY's main characteristic is that its exchange rate with the US dollar is fixed by the Chinese central bank.
CNY’s market participants are generally onshore exporters, who require yuan CNY and sell US dollars. The PBoC ("People's Bank of China") also buys US dollars to fix its monetary policy and the exchange rate of the USD/CNY pair.
Unlike the CNY, the CNH exchange rate is determined by CNH's private supply and demand, although the CNH supply is suppressed by Chinese government regulation. The result is that demand for CNH (e.g. by speculators anticipating an increase in the value of the Chinese currency) is generally higher than supply. It is therefore common to see the CNH trading above the value of the CNY.
USD/CNH, USD/CNY, CNH/CNY Quotes
As both CNH and CNY represent the RMB but are listed on two separate markets, it is normal to see the same price movements on currency pairs such as USD/CNH and USD/CNY.
USD/CNH
USD/CNH pair flowchart
USD/CNY
USD/CNY pair flowchart
It should be noted that CNH/CNY quotes are not really processable. This currency pair is always at parity (1.0000).
CNH/CNY
CNH/CNY pair flowchart
Arbitration of the onshore yuan (CNY) and the offshore yuan (CNH)
I can already see some traders’ eyes twinkling. If we know that the CNH/CNY pair will always be more or less at parity, why not arbitrate it?
Dealing in the CNH/CNY pair is not really feasible.I don't think many brokers offer it; and the spread would make it untradeable.
On the other hand, going through USD/CNH and USD/CNY, why not!
If you know that CNH/CNY will always tend to return to parity, but that currently the pair CNH/CNY scores at 0.99.What can you do to arbitrate it?
Answer: it is difficult to know if it is the CNH that is overvalued in relation to the CNY, or if it is the CNY that is undervalued in relation to the CNH. Simply put, you look at the USD/CNH and USD/CNY pairs, then buy the cheapest pair and sell the most expensive pair. As soon as the two pairs are quoted at the same price, the pair CNH/CNY has returned to parity.
NB: It has happened that the CNH/CNY pair separated from parity further than expected.
- The first time was before the collapse of Lehman Brothers in August 2008.Tensions in the CNH market (a sudden drop in demand) led to an overvaluation of the USD/CNH pair, which was then perceived as an indication of USD/CNY (which would be set higher by the PBoC in response to financial market turmoil).
- The second time when the European debt crisis worsened. Fears of a negative impact on Chinese exporters due to a sudden drop in demand from Europe led Chinese officials to indicate that the USD/CNY exchange rate would be kept relatively stable.This predicted a higher fixing of the USD/CNY pair and consequently lower demand for CNH, the USD/CNH pair then traded at higher levels than the USD/CNY pair.
The future of the CNH market
Two developments indicate that the CNH market will grow over time and become bigger for exporters, importers and investors.
- China aims to expand the international role of the CNH market by allowing foreign companies to issue CNH denominated bonds. For example, during 2010, the first "Dim Sum” bonds were issued by McDonalds, Caterpillar, China Development Bank, and some Hong Kong companies.
- The CNH will strengthen its expansion by reducing the capital controls that currently impede the flow of CNH.
The future of the CNY market
The CNY market is expected to benefit from the huge volumes of Forex trading.EUR/CNY, USD/CNY pairs should soon appear as major currency pairs (comparable with the EUR/JPY and USD/JPY pairs). It is still to be seen whether the Chinese government will leave the CNY in the hands of the stakeholders. Nothing is less certain. Worse than the FED, or the ECB, the PBoC must monitor its currency stringently, even if it finally becomes open to speculation.
