The renminbi yuan, abbreviated CNY on Forex, is China’s current currency. Recognized by the IMF as a global reference currency in 2015, it is an important element in the global economy and, automatically, in the currency market. But what is the place of the yuan on an international scale? And is it a good asset to negotiate when it comes to trading. To know everything about the yuan, discover our file:
Presentation and history
General presentation of the yuan
The yuan or renminbi has been China’s national currency since the end of the 19th century. Literally meaning “people’s currency”, the renminbi is the real currency and the yuan the unit of account. This currency is issued by the People’s Bank of China, but is not adopted by Hong Kong or Macao, which uses the Hong Kong Dollar and Pataca respectively. Sometimes abbreviated in RMB, renminbi yuan is also called “kuai” in Mandarin. Its abbreviation CNY on forex was adopted according to the ISO 4217 international standard code, whose CN refers to the People’s Republic of China and the Y to the Romanized name yuan. While the Latinized symbol of the yuan is sometimes marked with two bars, the currency is currently symbolized by a Y with only one horizontal bar: Ұ This is to avoid confusing it with the symbol of the yen, the Japanese currency.
For the record, the renminbi yuan takes its name from Yuan, a Mongolian dynasty that ruled China from 1279 to 1368. The currency officially began to circulate in the country at the end of the 19th century, but until 1995, China still used 2 different currencies: the renminbi and the FEC or Foreign Exchange Certificate. The latter being used exclusively by foreigners. For coins and banknotes in circulation, 1 yuan is equivalent to 10 jiaos or 10 mao, which is also equal to 100 fens. The banknotes issued by the bank include 1, 2, 5, 5, 10, 20, 50 and 100 yuan. There are also 1, 2 and 5 jiaos banknotes and, much rarer, 1, 2 and 5 fens banknotes.
On the international market
For a long time, the renminbi yuan was subject to a quasi-fixed exchange rate regime, which indexed it to the US dollar alone, within a range of /- 0.3%. This quasi-fixed parity was then replaced in July 2005 by an indexation to a basket of currencies, including the main international currencies, including the euro and the dollar. The yuan then began to be revalued and notably rose by 2.1% against the US dollar. Under pressure from world economic powers, mainly American parliamentarians, numerous reassessments have followed one another. In three years, a 20% appreciation was then recorded against the dollar and the euro.
In 2008, following the global economic crisis, the renminbi yuan depreciated again, at the initiative of the People’s Bank of China itself. This voluntary depreciation was, in fact, intended to maintain the country’s competitiveness in the export sector. In 2009, China then traded between currencies with its major trading partners, including Indonesia, South Korea and Argentina. These currency swaps amounted to several hundred billion Yuan. According to figures released by the Central Bank of China, China’s cross-border payments in yuan amounted to 2,580 billion yuan in 2011, or about 380 billion euros.
In March 2012, the Chinese Central Bank then announced that all international import-export companies had the opportunity to settle their cross-border exports in Yuan. At the end of 2014, the yuan accounted for 2.17% of international transactions. However, the Chinese currency remains “undervalued” and, despite global pressures to make it more flexible, the results are not very convincing until now, in 2016. However, the renminbi yuan entered the basket of international reserve currencies in August 2015 and is now recognized as a reference currency by the IMF (International Monetary Fund). A place that has been coveted by China for years.
The Chinese currency in the stock market
Place of the yuan on the Forex market
In fact, before 2008, the renminbi yuan only obeyed a government-imposed exchange rate regime, and has not yet emerged as a strong element in Forex. It was only with the weight of the global economic crisis that the Chinese currency made a breakthrough in the currency market. 2009 was also a significant year for the yuan, as the currency swaps made, particularly with the dollar, enabled it to enter the Forex market. However, the yuan’s position in the Forex market was initially modest, and its parity was limited to the US dollar (USD/CNY). The transactions carried out and the international economic movements have then allowed, over time, other parities such as with the euro (EUR/CNY), or with the Japanese yen (JPY/CNY).
However, due to its “undervaluation”, the yuan is not yet one of the major currencies on the Forex market. Even if China is now in second place in terms of world power, its currency is also difficult for traders to tame because of its volatility. The yuan is thus placed, until today, on the same rank as exotic pairs. According to analysts, the Chinese currency would also not be very attractive to trade, unless the People’s Bank of China decides to yield to the pressures of global economic powers, including the US government, and revalues its national currency. An appreciation of the yuan would indeed make it possible to envisage the realization of significant stock market profits. Investors are therefore waiting for this eventuality to materialize before opening transactions.
A volatile currency
But the fact is that the yuan remains a very volatile currency and, moreover, following a decline in value for more than 5 years, this implied volatility is now tending to increase. First of all, it is necessary to specify the difference between the yuan renminbi onshore, which is the CNY, the official currency managed by the Central Bank of China, and the yuan renminbi offshore, CNH, which is the currency for offshore transactions. And although the CNH followed the CNY’s trend overall, the spread between the two currencies widened suddenly.
As a result, traders were anticipating a further devaluation of the Chinese currency by the Central Bank of China. This is despite the fact that the latter had already argued that it planned to give in to the pressure and revalue its currency. The uncertainty is then at its optimal. The yuan can rise in value and devalue itself at any time. In addition, the spread between USDCNY and USDCNH widened, further impacting the volatility of the Chinese currency.
Despite the Central Bank of China’s intention to restore stability to its currency, the Chinese yuan remains difficult for investors to trade. Volatility expectations are indeed particularly harsh and, as an added bonus, traders do not know when the government will intervene to revalue the exchange rate. Stock market speculation on the yuan thus remains particularly risky, until proven otherwise.
The evolution prospects of the yuan
So when will the yuan be revalued? Stock market investors are getting impatient, given China’s prestigious position in the global economic market. And apparently, new lights could appear for this year 2016. After China’s wave of gloom in recent months, a five-year plan should be unveiled in March. A lot of hope lies in this plan, which could finally put an end to the downward trend of the Chinese currency. If the program is not successful, a USD rush could, on the contrary, reappear. It should be remembered that, so far, the Chinese government has mainly maintained its peg to the USD and, to this end, has not hesitated to spend more than $500 billion. For international actors, however, it would be more time to restore the true value of the Chinese currency and establish a better balance in the global economy.
In any case, there is a glimmer of hope since the government has already taken various measures to ensure the success of this five-year plan. Since the programme can only be implemented through foreign capital, China would have allowed foreign players to access the mainland Chinese bond market, valued at more than USD 7.5 trillion. This opening should then increase the motivation of international investors and create a bilateral flow for the Chinese currency. Proof that the government is on track to give this plan a chance to succeed. It should be noted that China does not particularly adhere to the borrowing system and its foreign debt represents only 10% of its current gross national income. In the public sector, its debt is only 1.5%. However, this five-year plan could mark a new beginning of the country’s opening up to the world economic market.
So how do you trade the yuan on the stock market?
With such a high level of uncertainty, trading the yuan is automatically risky. Investment in this currency is no longer reserved for banks and professionals, but this does not prevent individuals from carrying out trading operations and obtaining profits with this currency. However, to trade the yuan, which is particularly complex compared to other currencies, it is essential to master the right techniques.
Moreover, experts strongly advise amateurs to train with other currencies that are easier to tame before starting with the yuan. It is not enough to use simple trading tools, but it is necessary to know how to analyse global economic and political news before being able to make good speculations.
Thus, one of the trading techniques that could be adapted to the yuan is the operation of the SSI. This trading tool, which consists of a graph of curves, makes it easier to establish estimates by referring to extreme price positions. This graph shows the movements of the currency and gives the possibility to analyze its history, to better anticipate its future direction. Before starting, it is, of course, necessary to master this tool, and to recognize in particular the primary, secondary and tertiary price channels.
When these three trend lines cross, it creates a strong confluence of support and from there, the trader can start to consider a future position. If the price were to fall towards the meeting point, there could then be an increase and, in this case, a buy order. However, if the price does not move in the expected direction, there is always a stop loss order to limit losses.
In any case, it should not be forgotten that at present, the yuan remains a complex and volatile currency. Its evolution prospects are still uncertain. Monitoring economic news is essential to be able to tame this currency.
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