Buy Chinese Yuan?

For more information about possible future valuations of the Chinese currency, Renminbi, or Chinese Yuan, please subscribe to our China Investment Report.  Yes, we can help, but, there is always the "but"...

General Information about Renminbi, or Chinese Yuan

The renminbi was first issued shortly before the takeover of the mainland by the Communists in 1949. One of the first tasks of the new communist government was to end the hyperinflation that had plagued China near the end of the Kuomintang era.

During the era of the command economy, the value of the RMB was set to unrealistic values in exchange with western currency and severe currency exchange rules were put in place. With the opening of the Chinese economy in 1978, a dual track currency system was instituted, with renminbi usable only domestically, and with foreigners forced to use foreign exchange certificates. The unrealistic levels at which exchange rates were pegged led to a strong black market in currency transactions.

In the late 1980s and early 1990s, the PRC worked to make the RMB more convertible. Through the use of swap centers, the exchange rate was brought to realistic levels and the dual track currency system was abolished.

The RMB is convertible on current accounts, but not capital accounts. The ultimate goal has been to make the RMB fully convertible. However, partly in response to the Asian Financial Crisis of 1998, the PRC has been concerned that the Chinese financial system would not be able to handle the potential rapid cross border movements of hot money, and as a result, as of 2003, full convertibility remains a distant goal.

Exchange rate of the dollar vs. the renminbi

Since 1994, the policy on currency has been to informally peg the value of the renminbi against the value of the United States dollar. This policy was praised during the Asian financial crisis of 1998 as it prevented a round of competitive devaluations.

In 2003, this policy came under criticism by the United States. The fall in the value of the dollar caused the value of the renminbi to fall also, making Chinese exports more competitive. This led to some pressure on the PRC from the United States to increase the value the RMB in order to encourage imports and decrease exports. This is a policy that some feel would preserve manufacturing jobs in the United States. The G7 and European Union are also in favor of a re-evaluation of the exchange rate.

The Chinese government has resisted pressure to increase the value of the RMB, out of concern that it would cause Chinese jobs to disappear and would also expose domestic banks to currency risks that they are not prepared to handle. The belief, which is held by many economists, is that only fixed exchange rates or floating exchange rates are stable over the long term, because a one-time change in exchange rates might cause speculators in the future to take positions on possible exchange rate fluctuations which would lead to pressure to completely float the currency.