Major Currency Profile: What to Know About Chinese Yuan

Updated: Apr 6


Currency Chinese Yuan


With the rise in the dominant Chinese economy and the increasing acceptability of the Chinese yuan, many investors are looking for ways to access this market. Although the Chinese yuan is still pegged to the U.S. dollar and not yet freely traded, it is moving towards that status quickly and is becoming more accessible to investors. Investors have several ways to access the Chinese yuan, including direct purchase of the currency and holding it in cash, investing in funds that hold the Chinese yuan, and buying futures contracts on the currency. However, there are some nuances to be aware of with each option.


Major Currency Profile: What to Know About Chinese Yuan


The renminbi is used as a medium of exchange in China and as a unit of account for the country's financial and economic system. The renminbi has a currency symbol that translates as "people's currency". The "yuan" is the basic unit of the renminbi, but it is also used to denote the currency in general.


China's Economy Continues to Expand


Economic expansion in China may have slowed down, but the economy's growth is still strong enough to maintain a steady upward trend in demand for the renminbi. Moreover, liberalization of capital outflow restrictions means that interest in the yuan will continue to rise in coming years.


China's Currency Status


The renminbi is neither fully convertible nor freely floating, but it is floating in a controlled and defined manner. China has made a commitment to the International Monetary Fund (IMF) to continue its managed float pathway, which is partially driven by trade considerations. The Chinese government's policy is to gradually increase the flexibility of its exchange rate by allowing market forces to play a greater role. However, it will do so while maintaining an appropriate degree of control. China allows capital to flow out of the country freely but tightly regulates the flow of capital into China.


China's currency is by no means freely traded and has a somewhat complicated history. The Chinese government pegs its currency to the U.S. dollar, which allows it a degree of control over its currency values. However, China has recently moved to allow its currency to appreciate ever so slightly. As of 2015, the Chinese government allowed the Chinese yuan to appreciate by 3% against the U.S. dollar.


With this appreciation, the Chinese yuan became more widely used by businesses and investors worldwide, leading to additional investor interest in the currency.


RMB as the Next Global Reserve Currency


The Chinese yuan is poised to become the next global reserve currency, according to many experts in the financial industry.


China's currency will become the world's fifth-biggest global reserve currency next year, an increase from the eighth largest, according to HSBC. The bank made its prediction after a study of foreign exchange reserves, which are stored in currencies for safekeeping.


China's currency reserves are expected to rise to 4.0% of the country's gross domestic product by 2017. China's currency is still pegged to the U.S. dollar, which means the Chinese government can manipulate its value. However, with the appreciation of the yuan in 2015, the Chinese government announced that it would no longer manipulate its currency to keep it low in value.


Major Economic Indicators


China is one of the world's fastest-growing countries. Its economy is expanding faster than any other major economy in the world. The country's economy is growing at a rate of 7% per year. This is faster than the 6.3% growth rate of the American economy, the second-fastest growing in the world.


China's economy has grown steadily over the past 25 years. From 1994 to 2014, GDP growth averaged 10.66%, with only a few brief recessions that were quickly resolved.


China's Purchasing Managers Indexes


China's Purchasing Managers Index (PMI) is a measure of manufacturing activity, representing the percentage of surveyed manufacturing industries that reported growth in their activity levels. The PMI reading is between 50 and 100, with 50 representing an equal balance of reporting growth and contraction and 100 representing an equal balance of reporting expansion and contraction. In China, the manufacturing sector accounts for approximately 27% of the country's gross domestic product (GDP), the most of any sector.


China's PMI readings have been trending higher since the 2009 global recession. This trend is a sign of healthy economic growth in the country.


1 - China's Manufacturing PMI


The Chinese manufacturing sector has been improving steadily since the recession, where manufacturing PMI was at its lowest level of 49.1 in the third quarter of 2009.


In the fourth quarter of 2016, the PMI reading for China's manufacturing sector reached a high of 53.3. This indicates that the sector is continuing to grow, in line with the broader economy.


2 - China's Non-manufacturing PMI


While China's manufacturing sector is booming, the non-manufacturing sector is growing at a slower rate. The non-manufacturing PMI was 48.8 in the third quarter of 2016, up from 47.1 in the previous quarter. This is still lower than the PMI of the manufacturing sector. However, it represents an improvement over the lowest PMI reading of 43.8, which occurred in the third quarter of 2009.


How to Gain Access to the Chinese Yuan


While the Chinese yuan is not yet freely traded, the currency is open to investors and growing in popularity. Investors may put money into the Chinese yuan in one of three ways: by buying the currency directly, by investing in funds that hold the currency, or through futures contracts on the currency.


Buying the Chinese Yuan Directly


If you'd like to gain direct access to the Chinese yuan, you can purchase the currency using a currency exchange. Currency exchange is a company that offers currency exchange and other money services, such as bill-payment services, wire transfers, and foreign exchange services. You can order currency online or in person or have it delivered to your home.


Before buying the Chinese yuan, you should check the exchange rate in relation to the U.S. dollar. This will give you an idea of how much the currency will cost you.


Where to Buy Chinese Yuan in the U.K.


If you live in the U.K., you can buy the Chinese yuan from traditional currency exchanges, such as Travelex, but also from a number of online providers. Some of these online providers also offer other services, such as currency transfer and bill-payment services.


Currencies Direct – This online provider has been operating since 2003. It offers a competitive exchange rate and low delivery charges.


Global Xpress – This currency exchange provider offers both international and local delivery. It also offers currency transfer services.


Currency Solutions – This online provider offers competitive exchange rates and a 24-hour online service. It also offers bill-payment services.


TransferWise – This online provider offers competitive exchange rates and low delivery charges.


Investing in the Yuan through ETFs or ETNs


Investors may also choose to gain exposure to the Chinese yuan by including it as a component of a diversified investment portfolio. You can do this by investing in ETFs or ETNs that track the performance of the currency.


ETFs


An ETF is a basket of assets, such as stocks, commodities, or bonds that track an industry or economic index. A fund manager creates the ETF, and investors can buy shares of the fund to gain exposure to the underlying assets.


You can invest in ETFs that track the Chinese yuan by using a variety of platforms and brokerage firms.


ETNs


An ETN is a type of debt security that tracks an underlying asset, similar to an ETF. However, the ETN is sold as debt security in the form of a certificate. ETNs are debt securities, and they are not guaranteed by the ETN issuer.


ETNs may be appealing to investors who want to gain exposure to the Chinese yuan but wish to avoid the risks associated with some of the currencies that are available on the market.


Investors can use the same platforms to buy ETNs as they do for buying their ETFs.


Buying Chinese Yuan through Futures Contracts


Investors can also gain access to the Chinese yuan through futures contracts. Futures are a type of derivative financial instrument in which the investor indirectly holds a position in the underlying currency. Investors can also buy contracts directly from a futures exchange.


Getting Currency Protection


If you plan to do business in China, or if you're holding a significant amount of yuan in your portfolio, it's a good idea to have currency protection in place. This will ensure that you're able to protect your currency holdings from currency devaluations.


To protect your holdings, you can buy insurance from a variety of providers, including:


1 - Travelers Insurance


Travelers Insurance offers international currency protection. This covers all financial losses should the U.S. dollar weaken in value.


2 - American Express


American Express offers currency insurance and other types of international insurance. This includes coverage for your possessions and investments, travel, property, and many other types of insurance.


3 - Hedging Platforms Like Bound


Investors who don't want to buy insurance can use a hedging platform to protect their currency positions. Hedging platforms are web-based services that allow you to hedge your currency positions without buying insurance or making another purchase.


Futures contracts are another type of option for hedging your currency positions. While currency futures are not available for the Chinese yuan, you can purchase futures contracts on other currencies, such as the euro.


Capital Controls


Capital controls are regulations that a country places on the movement of money. These controls can vary significantly by country, but they generally seek to protect the economy from volatility and prevent foreign investors from taking too much of a share of the local economy. China has a set of capital controls in place that affect foreign investors, particularly those coming from the United States.


Exchange Controls in China


China has a set of exchange controls in place. Under these controls, the government attempts to limit the amount of money that flows in and out of the country. It also limits the amount of foreign currency that can be exchanged.


The Chinese government controls the value of its currency by influencing the supply of the currency in the market. To do this, the government manages the quantity of foreign currency that can be exchanged for yuan. This is currently set at 100,000 yuan.


It's important to note that China imposes its own capital controls, separate from those of the United States. When China imposes such capital controls, the U.S. government may also impose controls that restrict the movement of money between the two countries.


The U.S. and China are currently in discussions about how to resolve these differences. Once the two countries reach a decision, it will become clear how the U.S. government handles the capital controls.


Why Investing in Yuan is a Good Decision


China has been growing at a steady rate over the past decades. As the country continues to expand economically, the Chinese yuan is becoming an increasingly popular currency for investors.


Over the past few decades, the Chinese government has allowed greater access to the yuan for investors. This has been a key factor in the currency's growth. Simultaneously, the yuan's value has increased due to steady growth in China's manufacturing and service sectors.


Additionally, China is a major global economy, and it has the second-largest economy in the world. As the country continues to grow, it is expected to become the largest economy in the world. That will help boost the value of the Chinese yuan.


Conclusion


If you're looking for a new way to diversify your investment portfolio and gain exposure to a fast-growing economy, the Chinese yuan may be a good option for you. This currency is open to investment from around the world, and it offers many potential benefits.


Before investing in the Chinese yuan, it's important to familiarize yourself with the currency. You can do this by researching the types of companies that do business there, how the currency is managed, and how the economy is growing. You can then purchase the currency in one of three ways: using a currency exchange, investing in ETFs or ETNs, or hedging your investments.


Should you need FX hedging for businesses, Bound will offer you everything you need. The auto hedging platform is dedicated to making currency protection better for businesses. Contact us today!



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