Aug
Ask the average Westerner a thing or two about China’s currency and he will most likely explain that he KNOWS it is highly, grossly, outrageously devalued (especially if we are referring to individuals who actively watch the news and are most likely well aware of the significant trade tensions between China and the United States). However, once you dig just a little bit deeper, even only as deep as asking what the name of China’s currency is… you’ll most likely head crickets and nothing more.
Why? Simply because the actual China-related knowledge of the average Westerner is superficial at best, with most people preferring a headline-oriented approach rather than meaningful (and therefore time-consuming) research. Here at ChinaFund.com, we believe the exact opposite: in unbiased analysis backed by facts rather than (geo)political rhetoric.
Let’s start… with the beginning, the name of China’s currency. The official name is actually the renminbi (which literally means “people’s currency”) but a lot of people choose to refer to it as the Chinese yuan (abbreviated CNY). To keep things accurate, however, we need to explain the difference: “renminbi” is the actual name of the currency, whereas “yuan” is the primary unit of account, with one yuan representing 10 jiao and one jiao representing 10 fen.
In other words:
- Renminbi represents the name of the currency
- Yuan represents the name of one unit of currency, with jiao being the name used for 1/10 of a unit and fen being the name used for 1/100 of a unit
As tumultuous as the present of the renminbi is, its past was even more problematic. The fact that it was launched (along with the People’s Bank of China being founded) back on the 1st of December of 1948 (when the civil war between the communist rebels of Mao Zedong and the ruling nationalists of the Kuomintang party was in full swing) speaks for itself. In other words, the renminbi appeared during the final days of the Republic of China (ROC).
As mentioned previously on ChinaFund.com, Mao’s communists emerged victorious and on the 1st of October 1949, the People’s Republic of China (PRC) was born, with the renminbi as the sole national currency and Mao’s administration trying to tackle the hyperinflation China was (unsurprisingly) dealing with.
Eventually, stability was reached and from 1955 up until 1971, the exchange rate of 2.46 yuan being worth one US dollar was set and enforced, with the year 1971 being important in light of the fact that China gained its seat at the United Nations back then (a situation related to the China-Taiwan dynamic, covered in another article). With the second RMB series issued in 1955 and the third in 1962, things were fairly straightforward, in line with what one would expect from a centrally planned economy with wage and price controls in place.
From 1972 to 1979, the renminbi went up in value compared to the US dollar, with 1.5 yuan being worth one US dollar. As the more loyal ChinaFund.com readers know all too well by now, Deng Xiaoping’s reforms started kicking in and the currency dimension was, of course, included in the equation. More specifically, the economy of China was becoming more open on all fronts and as of 1979, firms were actually allowed to retain a certain foreign exchange claim percentage.
At that point, the renminbi was considered overvalued and a devaluation process began, first through implementing a two-tier system which had an internal settlement rate of 2.8 yuan for one US dollar as well as an international rate and then with the dual exchange rate approach ending in 1985, as 2.8 yuan became worth one US dollar both internally and internationally.
However, Chinese exporters were still anything but happy by the early nineties, with them quasi-unanimously considering the renminbi overvalued. As such, in line of the first forex trading center being opened in Shanghai, China moved on to a (closely) managed floating exchange rate, with 8.28 yuan being worth one US dollar.
From 1997 up until 2005, a peg was maintained that had 8.3 yuan being worth one US dollar and as some readers undoubtedly thought about the famous “Asian Contagion” of 1997 (major currency crisis all over Asia), it is worth pointing out that China did not devalue in line with its neighbors and as such, its currency actually represented a pillar of stability for the region throughout the crisis.
Also, in the 1997 – 2005 equation, it makes sense to also mention the fact that China became a World Trade Organization member back in 2001 and as it started entering the “big league” of nations one step at a time, various other nations had a thing or two to say about its currency-related policies. One might argue that when it comes to the US, currency-related concerns stated in 2003, when senator Chuck Schumer approaching the US Congress with the first ever bill which referred to the yuan value. Back in 2006, the first bill which recommended economic sanctions for China if it keeps the yuan artificially devalued was co-sponsored by two senators and the rest, as they say, is history.
While there is a target for 2020 to represent the year in which China embraces full convertibility, let’s just say it’s a tricky goal in light of the fears Chinese authorities have regarding issues such as capital flight and all sorts of instability types that might pop up. It is however inevitable, in light of the fact that, again: China is entering the spotlight one step at a time (from becoming a WTO member in 2001 to being included in the IMF’s basket of currencies in 2016).
In a nutshell, this is the trajectory of the renminbi from 1948 up until today but before ending this article, an important reminder is in order: while it is true that Chinese exporters don’t want a strong renminbi, it is equally true that it would be economically hypocritical to consider China the only game in town when it comes to currency devaluation. To put it differently, as convenient as it may be to exclusively blame everything on China and ignore the fact that interest rates went to zero in the US and even negative in the European Union or that $85 billion per month were “printed” by the Federal Reserve at the height of its quantitative easing process and even more by the European Central bank… it would be an intellectually dishonest approach, to put it mildly. While currency devaluation is undoubtedly a legitimate concern when it comes to China, we cannot reach a meaningful understanding of today’s monetary realities (in China or anywhere else) without seeing the big picture.