5 minute read
Jan-2022: The Chinese yuan has been strengthening, so let's take a look at the history of the currency, some need-to-know info, and what the changing value of the renminbi means for those importing from China.
Just call me Yuan
China's currency is the renminbi, with currency code 'CNY', and the unit of account is the yuan. It's similar to pounds and sterling – I have ten yuan in my pocket, not ten renminbi.
Currency flows in and out of mainland China are restricted, so there are two forms of the currency: onshore and offshore. CNY is the onshore currency and CNH is freely traded on international markets via Hong Kong, hence the 'H'.
History Class
Here's what you need to know:
- From the 1950s to the 1970s, China fixed the renminbi's exchange rate at a highly overvalued level to lower the cost of imported machinery and equipment
- Clever China – once they had the gear they needed, they allowed their currency to appreciate by market supply and demand over about 15 years
- In 1994 the renminbi was 'pegged' to the US dollar at a rate of 8.28
- In 2005 China moved to a 'managed float' system
- But after a couple years of appreciation, the currency was re-pegged to 6.83
- Now there is a daily reference rate set by the PBOC and the currency is allowed to fluctuate within a fixed band either side, currently at 2%
Why is the yuan strengthening?
- Robust exports – despite the pandemic and global supply issues, create demand for the yuan, maintaining a higher price
- A tolerant PBOC – the central bank is (currently) tolerant of a higher yuan, but they have warned in the past not to expect one-way moves in the currency
- Bettings on bonds – there's plenty of international enthusiasm for Chinese bonds, creating demand for the currency
What does this mean for an importer buying from China?
Simply put, a stronger yuan means higher import costs. If you pay for your Chinese goods in US dollars then you don't escape easily: as a UK importer you have to think about the USD/CNY rate as well as the GBP/USD rate.
A Chinese exporter, in the face of a a strengthening yuan (vs the dollar) will increase the dollar sales price – so they receive the same amount of renminbi – meaning imports in dollars go up in price. If the pound falls against the dollar then that's a double-hit!
Hedging yuan forward yields a better exchange rate than the prevailing spot rate. You can hedge the offshore yuan with deliverable forward contracts in USD/CNH or GBP/CNH. So it might be worthwhile asking your supplier if they would like to receive Yuan rather than dollars.
If this isn't possible then you the team at Oku Markets can look at how best to hedge your risk using our range of deliverable and non-deliverable hedging solutions 🚀
