Chinese Renminbi

The Chinese Renminbi (also known as the Yuan) is the official currency of the People's Republic of China. The name “Renminbi” literally translates to “the people's currency,” and it is issued and managed by the country's central bank, the People's Bank of China (PBoC). It's helpful to think of the relationship between the two names like that of “Sterling” and “Pound” in the UK: Renminbi (RMB) is the currency, while Yuan (¥) is the primary unit of account. For investors, the most critical feature of the Renminbi is its dual nature. It exists in two forms: the onshore Yuan (CNY), which is used within mainland China under tight government control, and the offshore Yuan (CNH), which is traded more freely in international hubs like Hong Kong. This structure allows China to maintain control over its domestic economy while slowly internationalizing its currency. Understanding the dynamics between CNY and CNH is essential for anyone investing in Chinese assets or analyzing companies with significant exposure to the Chinese market.

To a foreign investor, not all Yuan are created equal. The distinction between the onshore (CNY) and offshore (CNH) versions is fundamental. Think of it as a currency with a domestic personality and an international one.

• CNY (Onshore Yuan): This is the “real” Renminbi that circulates within mainland China. Its value is not determined by free-market forces but is instead tightly managed by the PBoC through a daily reference rate. Access to CNY is restricted by China's strict capital controls, making it difficult for foreign investors to trade directly. Its stability is a reflection of domestic policy goals.
• CNH (Offshore Yuan): This is the version of the Renminbi that trades outside of mainland China. Its value is determined by supply and demand in international markets, making it a much better gauge of global sentiment towards the Chinese economy and its currency. When you invest in a Yuan-denominated ETF or bond from outside China, you are dealing with CNH. The price difference, or spread, between CNY and CNH can be a telling indicator of market pressure and expectations of capital flows into or out of China.

Unlike the US Dollar or the Euro, which float freely, the Renminbi operates under a managed floating exchange rate system. This is a hybrid system that blends market forces with firm government control. Each morning, the PBoC sets a “daily midpoint fix” for the CNY against a basket of currencies (with the US Dollar being the most heavily weighted). For the rest of the trading day, the onshore CNY is allowed to fluctuate only within a narrow band, typically 2% above or below this midpoint. This mechanism gives Beijing a powerful lever to influence its economy. By setting a weaker fix, it can make Chinese exports cheaper and more competitive globally. By setting a stronger fix, it can curb inflation and increase the purchasing power of its citizens. For investors, this means that the Renminbi's value is as much a political signal as it is an economic one.

For practitioners of value investing, understanding the Renminbi is not just an exercise in currency speculation; it's a crucial part of assessing the intrinsic value of many global businesses.

Directly or indirectly investing in the Renminbi has become more accessible over time, but it comes with unique risks.

• How to Gain Exposure:
  1. Currency ETFs: Several exchange-traded funds track the performance of the offshore CNH.
  2. “Dim Sum” Bonds: These are bonds denominated in CNH and issued in Hong Kong, offering a fixed-income way to invest in the currency.
  3. Chinese Equities: Investing in Chinese companies provides indirect exposure. H-shares (listed in Hong Kong) are easily accessible, while A-shares (listed in Shanghai or Shenzhen) are increasingly available to foreign investors.
• Key Risks: The primary risk is policy risk. The PBoC and the Chinese government can change the rules of the game overnight. Geopolitical tensions and a relative lack of corporate transparency compared to Western markets are also significant factors to weigh.

The Renminbi’s movements offer valuable clues about the health and direction of the world's second-largest economy.

• A Strengthening Renminbi often indicates economic strength and policy confidence. It's good for Chinese consumers and for foreign companies selling goods in China, as their profits translate into more of their home currency.
• A Weakening Renminbi can signal economic stress or a deliberate attempt by Beijing to boost its export sector. This can hurt foreign companies operating in China by reducing the value of their repatriated profits.

A value investor analyzing a global company must check its exposure to the Renminbi. A mismatch—for instance, a company earning revenue in a weakening Yuan while its debt is in a strong US Dollar—can severely impact its financial health.

China's long-term ambition is to establish the Renminbi as a major global reserve currency, reducing its reliance on the US Dollar. A massive step in this direction was the Renminbi's 2016 inclusion in the International Monetary Fund's (IMF) Special Drawing Rights (SDR) basket. This officially recognized it as one of the world's elite currencies. While the path to full internationalization is long and fraught with political and economic hurdles, the trend is clear. For the patient investor, this suggests a future of increasing global demand and importance for the “people's currency.”