The Yuan Goes Global

Chapter 3 Mini Case

1. How does the Chinese government limit the use of the Chinese currency, the RMB, on the global currency markets?

In order to control the use of Chinese currency, all trading inside China between the RMB and foreign currencies, being conducted only according to Chinese government regulations. A Chinese exporter typically pays in U.S dollars and is not allowed to keep the dollar proceeds in any bank account. Exporters are required to exchange all foreign currencies for RMB at the official exchange rate set by the PRC. All hard-currency earnings from massive Chinese exports are therefore turned over to the Chinese government. Besides, the Chinese government adopted a gradual policy of developing the trading in the yuan, but through its own onshore offshore market, Hong Kong to restrict the flow of yuan out of China.

2. What are the differences between the RMB, the CNY, the CNH, and the CNY-NDF?

The RMB is the official name for the currency in China (physical currency). CNY, or yuan, is the name of a unit in renminbi currency (deliverable). It refers to trading of RMB in the regulated onshore Chinese market and is used by domestic companies, Chinese residents and foreign companies with Chinese presence. CNH refers to trading of RMB in Hong Kong offshore market (can be used outside the Chinese mainland and is deliverable). Offshore borrowing and lending are market-driven and not subject to the regulations that set interest rates on the Chinese mainland. CNH is now actively used for cross-border trade, finance and direct investment. CNY-NDF is the yuan offshore Non-Deliverable Forwards Transactions. It is settled in currency like Euro or USD since the CNY itself would take access to physical volumes or deposits of reminbi. The CNY NDF is driven by investors (and hedge funds) who are speculating purely on their expectation of the CNY. By entering into CNY NDF with Bank of China (Hong Kong), you can buy or sell CNY at a rate...