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What is the Chinese currency, and how to trade the Yuan

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Trade Yuan

Having experienced its highest volatility in history over the past two years, due in no small part to Donald Trump's trade war with China, many traders are asking themselves how they can trade the Chinese Yuan.

In this article, we'll be sharing the ins and outs of trading the Yuan, including what the Chinese currency is, the Renminbi vs. CNY and CNH, how the Yuan behaves in Forex, the characteristics of the Yuan and how it has been affected by the ongoing trade war with the US.

Yuan trading - What is the Chinese currency?

The Chinese currency is called Renminbi, but is often referred to as the Yuan. So if both of these names refer to the same thing, what is the difference between the Yuan and Renminbi?

Renminbi means "people's currency" in Chinese - it is the official currency of China and is one of the oldest currencies in the world. The Yuan, on the other hand, is the unit of account of China's economic and financial system.

What is the symbol for Chinese currency in trading?

The Yuan is sometimes denoted as "RMB", though the symbol for the Chinese currency is "Ұ". This is different from the Japanese Yen symbol "¥", which has two bars crossing the Y.

In Forex, the symbol of the Chinese yuan is CNY, with CN referring to the People's Republic of China, and Y to the Yuan.

CNY Chinese currency and CNH Chinese currency

What is the difference between CNY currency and CNH currency?

The Chinese RMB currency 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.

In addition, 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.

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Is there a price difference between CNY and CNH?

Although they are listed on two separate markets, the CNY Yuan and the CNH Yuan both represent the price of the Renminbi.

It is therefore common to find a strong correlation between CNY and CNH. Indeed, the curves of the USD/CNY and USD/CNH graphs follow each other very closely most of the time.

USD/CNY Daily Chart

Trade Yuan: USD/CNY chart

Source: USDCNY, tradingview.com. Charts for financial instruments in this article are for illustrative purposes and does not constitute trading advice or a solicitation to buy or sell any financial instrument provided by Admiral Markets. Past performance is not necessarily an indication of future performance.

USD/CNH daily chart

Trade Yuan: USD/CNH chartSource: USDCNH, MetaTrader 5. Charts for financial instruments in this article are for illustrative purposes and does not constitute trading advice or a solicitation to buy or sell any financial instrument provided by Admiral Markets. Past performance is not necessarily an indication of future performance.

Trading the Yuan in Forex

What is the place of the Yuan in Forex? Could the Yuan rise to the level of the Euro and the Dollar in terms of volumes?

The Dollar-Yuan is a currency pair still considered to be exotic, and it's trade volumes are not yet entering 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.

You should know that before 2008, the Renminbi followed a quasi-fixed exchange rate regime imposed by the People's Bank of China. The 2008 crisis then changed things somewhat and allowed the Yuan to play a bigger role in the currency 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, on the Forex Dollar/Yuan pair is not a pair of choice among traders, despite the economic power of China. The Euro/Yuan is even less followed in the Forex market.

China's currency against the Dollar is not very attractive to trade in view of many investors, unless the People's Bank of China decides to revalue the Yuan, and lets it move freely in the currency market.

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What are the characteristics of Yuan trading 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 more risky, but the Renminbi therefore also presents better opportunities for traders looking for volatility.

In addition, if - we can even say when - 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.

Indeed, the Central Bank of China is showing signs of wanting to stabilise its currency and correct its undervaluation, to allow it to take a more important place in world trade. In this regard, the previous opening measures taken were rewarded with the integration of the renminbi into the basket of IMF SDRs (Special Drawing Rights of the International Monetary Fund) in 2016.

In the meantime, however, it remains possible and interesting to trade the Yuan on the Forex in the short term, and take advantage of the short term fluctuations for experienced traders.

Factors influencing Yuan trading

If you are considering trading the USD/CNH, you might be wondering which factors influence the price action of the Chinese currency?

We can note two main factors that impact the Yuan on Forex:

  • Government and People's Bank of China interventions: When it comes to Chinese currency, the role of the central bank is the main factor that impacts the price of the Yuan. The People's Bank of China has indeed often intervened to devalue its currency, and continues to regulate it in a much more direct and vigorous way than what the ECB and the Fed.
  • The health of the Chinese economy: The state of health of the Chinese economy also plays an important role in the evolution of the Yuan. The slowdown or acceleration of the Chinese economy influences the price of the Renminbi.

The Yuan also displays short-term fluctuations in certain publications of indicators available on the economic calendar, with the most important being GDP growth, the inflation rate, industrial production and PMI. Learn more about economic indicators in Forex.

How has the US-China trade war affected trading the Yuan?

On 22 March 2018, US President Donald Trump signed retaliatory tariffs on up to $60 billion of Chinese imports. China responded in kind, and nearly two years later, the US has applied $550 billion in tariffs to Chinese goods, while China has applied $185 billion in tariffs to US goods.

While every market is affected in some way by Trump's trade war with China, the US Dollar and Chinese Yuan is where most traders will be looking for opportunity.

Since the beginning of the trade war, the USD/CNH has experienced significant volatility, hitting a two-and-a-half year low of 6.2353 in March of 2018, and an all-time high of 7.1950 18 months later in September of 2019.

When it comes to what could happen next, a Bank of America Merrill Lynch Global Research report predicted three scenarios:

Scenario 1: A full blown trade war - the yuan depreciates 10%

Because Chinese imports from the US are only a third of the volume of US imports from China, China cannot match the US's tariffs in terms of quantity. What China can do is devalue the yuan by 10%. This would then cancel the impact of a 10% tariff on Chinese goods.

Scenario 2: A drawn out impasse - the yuan remains unchanged

In this case, the bank's analysts said that the CNH would likely remain range bound. This would be due to China being wary of angering the US by allowing the Chinese currency to weaken, alongside adding to challenges for Chinese exporters by allowing the currency to strengthen.

Scenario 3: A trade deal - the yuan appreciates modestly

If China and the US do finalise a trade deal, yuan will appreciate, but its rise is expected to be limited. This is because "any deal is likely to include stipulation that would limit the room for any future RMB depreciation," the bank explained.

We can see these theories playing out in the price action over the past two years, with the Chinese Yuan depreciating in the initial months of the trade war, then rising when it appeared that a deal was imminent.

Trading the Yuan - Conclusion

The Chinese currency can be an interesting choice for many Forex traders, especially considering recent volatility in the USD/CNH currency pair due to the US-China trade war.

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 USD/CNH is unlikely to become a Forex major in the near future.

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