About RMB
RMB at a glance
The literal translation of the word ‘renminbi’ is ‘the people’s currency’, but it may soon be more appropriate to think of it as ‘the world’s currency’ as it looks set to become one of the major reserve currencies of the world.
What is RMB?
The renminbi, or RMB as it is otherwise known, is the official name given to the currency of China. Its literal translation is ‘the people’s currency’.
What is the difference between renminbi and yuan?
The main unit of the currency is the yuan – just as the ‘pound’ is the main unit of England’s Pound Sterling. The terms ‘renminbi’ and ‘yuan’ are often used interchangeably.
Why is there an onshore and offshore version of the currency?
Until the process of internationalisation is complete, RMB will be traded in two separate and distinct markets – the onshore market and the offshore market:
- The onshore market - designated by the currency code CNY, the onshore renminbi is used on mainland China and held within Chinese bank accounts. The currency is highly regulated and is managed by the People’s Bank of China. It has a daily price setting referencing a basket of global currencies with an intraday trading band of +/-2%.
- The offshore market - designated by the currency code CNH, the offshore market is for RMB used primarily outside mainland China. The offshore currency emerged in 2004 so it could be used in global markets and is now fully convertible. There are fewer constraints on the offshore RMB, allowing people to trade and settle it freely and without connection to any domestic trade activity. It can also be applied for settlement of current account activities in mainland China. That being said, the only ISO code recognised for renminbi is CNY. Originally, Hong Kong was the only market that could trade offshore RMB, today there are over 22 officially appointed offshore RMB financial centres including London, New York, Singapore and Sydney.
Why do the onshore and offshore versions trade at different rates?
As a dually managed currency both by the Hong Kong Monetary Authority (HKMA) and The Peoples Bank of China (PBOC), ‘offshore RMB’ is derived from the PBOC’s daily price setting and intraday market dynamics, plus supply and demand which alters the CNH price thereby, seeing it behave as a free floating currency with no trading bands restrictions.
What is internationalisation?
In 2009, the Chinese government decided it would internationalise the RMB so it could be used in global trade and finance. This involves making the currency fully convertible so it can be exchanged for other currencies without restriction. Internationalisation will allow RMB to be widely circulated outside of China and open up more of China’s economic opportunities to the world.
The Chinese government’s approach to internationalisation has been very successful. In a short period of time the currency has emerged from relative obscurity to being used by more than 10,000 financial institutions in more than 100 countries1, with more than 20 bilateral swap agreements between various central banks and the People’s Bank of China.
Things you should know
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