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Friday, April 22, 2016

Understanding the Difference: Yuan vs RMB

Yuan vs. RMB: Understanding the Difference

By Prableen Bajpai, CFA (ICFAI)

Chinese currency is a hot topic for many reasons. Not only does it denote one of the world's biggest economic superpowers, but it also falls central in one of the most debated issues involving China today—its mercantilist policy of artificial undervaluation of its currency against the U.S. dollar to give its exports an unfair price advantage. There has been a consensus among economists that the Chinese currency has been undervalued by about a 15% to 40% range for many years. However, the International Monetary Fund (IMF) stated in the summer of 2015 that the Chinese currency was no longer undervalued against the dollar given its recent appreciation.

The Chinese yuan renminbi (CNY) has never been close to being considered an international currency because of the Chinese government's rigid controls. However, things have changed. According to Standard Chartered Bank, the usage of renminbi (RMB) has expanded by 21 fold since 2010 and the currency has appreciated by 25% vs. the dollar over the past 10 years. Standard Chartered also predicts that 28% of China's international trade will be denominated in RMB by the year 2020. The renminbi recently made it to the list of top five most used currencies, surpassing the Australian and Canadian dollars; it's now a part of the IMF’s Special Drawing Rights (SDR)—an international reserve asset that the IMF created as a supplement to member countries’ official reserves—after a round of screening in November of 2015.

For more about the Chinese currency today, read on. (For related reading, see: Is the Yuan the New Greenback?)

Renminbi vs. Yuan

With speculation about China suppressing the value of its currency starting to fade and Beijing looking at the internationalization of its currency, one question continues to perplex many: Does China have two currencies? Does it use the yuan (¥), the renminbi or both?

According to ECR Research: “China’s currency is officially called the renminbi. The yuan is the unit of account.” Renminbi translates to “the people’s currency” in Mandarin; it was first issued in December of 1948 with the establishment of the People’s Bank of China. Though the official abbreviation is CNY, the abbreviation as RMB is very common too. Yuan is also referred to as “kuài” in spoken Chinese.

Yuan is the unit of account, which means that the currency is denominated in 1 yuan, 2 yuan, 5 yuan, 10 yuan, 20 yuan, 50 yuan, or 100 yuan, though the paper money also comes in smaller denominations like fen and jiao. One yuan equals 10 jiao, which equals 100 fen.

Popular analogies given to explain the difference between yuan and renminbi are drawn fromBritish pound sterling vs. the pound or Federal Reserve notes vs. the U.S. dollar. Any expression of price is always in dollar, pound, or yuan—not Federal Reserve notes, sterling, or renminbi. The price of any commodity or transaction would be $120, £100 or ¥150.

The People’s Bank of China makes the usage of renminbi and yuan somewhat clear: “In April, RMB settlement of cross-border trade in goods, cross-border trade in services and other current account terms, outward FDI (foreign direct investment) and inward FDI amounted to 481.6 billion, 57.5 billion, 20 billion and 80.3 billion yuan, respectively.”

Thus, while the bank talks about settlement of renminbi, the values are denominated in yuan.

The Bottom Line

Chinese currency is growing. The country has been doing a lot to back its currency, including promoting free usage of renminbi. So whether you know it as yuan or renminbi, what matters is that the currency from China is set to grow fast and gain importance on the global stage. (For related reading, see: Is the Chinese Yuan a Good Investment?)

Yuan vs. RMB: Understanding the Difference | Investopedia

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