The Chinese Yuan

The currency of mainland China is the Chinese Yuan.

The Chinese Yuan is also called the RenMinBi since 1948, which in Chinese means the currency of the people.

Even though China is now the 4th largest economy in the World and a major trading partner of the United States of America, its currency the Yuan still cannot be freely traded .

This confirms what the Chinese have already shown to the World, i.e. that the American way is not the only way. The U.S.A. political system is based on a democracy whilst China’s uses a single political party, but both countries have been able to provide economic growth and stability to their citizens.

Similarly the American system praises freely floating currencies whereas the Chinese Yuan has been tightly controlled by the Mandarin authorities in recent memory. And both economies are doing fine.

The currency of a country is like a double-edged sword. By trying to push the currency to a favorable level, this can help support the entire economy. This is what the Chinese have been doing in a big way in the past twenty years. But if natural forces were to push a currency the other way, it could hurt any economy.

The devaluation of the Renminbi has been the engine of the explosion of Chinese exports since the early 80’s, and the corresponding unprecedented domestic growth.

The RMB/USD rate went from 1.50 Yuan per USD in 1980 to the low exchange rate of 8.62 in 1994. China maintained the Yuan at the low pegged level (as this is an inverted scale) of 8.27 between 1997 and 2005.

Finally succumbing to international pressure in 2005, the Chinese Government introduced a managed floating exchange rate, letting the currency move within a narrow 0.3% band, later extended to 0.5%.

This was the beginning of the free float for the Renminbi, but they have not yet gone all the way.

The Chinese Yuan has progressively strengthened, first slowly, then at accelerated pace, until it reached 6.83 in the summer of 2008.

By then it had became more valuable than the Hong Kong Dollar, which has remained pegged to the greenback at 7.78 for the past twenty years. This was a landmark as Hong Kong is the prime economic jewel of China, and as such its currency should have more value than the mainland one.

The Chinese Yuan has since remained around 6.80 versus the US dollars. It was allowed to reevaluate, but the Chinese still control it very tightly.

It is worth noting that converting the Renminbi paper money is highly controlled. In China, only businesses earning foreign currency income are allowed to exchange it. This is how the Government controls demand and supply.