Rmb Cryptocurrency: Investing In China's Digital Yuan

As China's economy continues to grow, investors are increasingly looking for ways to gain exposure to its currency, the yuan (RMB). While the yuan is not yet fully market-driven, it is becoming more readily accessible to investors. There are several ways to invest in the yuan, including purchasing it directly and holding it in cash, investing in funds that hold the Chinese yuan, and buying yuan futures contracts through forex brokers. Additionally, investors can open savings or deposit accounts denominated in yuan and can also buy exchange-traded funds (ETFs) that mirror the performance of the Chinese currency. When investing in the yuan, it is important to consider the exchange rate movements and the associated risks, as well as the monetary policies of the Chinese government.

RMB exchange rate movements

The RMB (Renminbi), or Chinese yuan (CNY), is the official currency of China. The yuan is the principal unit of account for the RMB. The value of the RMB has been tightly controlled by the People's Bank of China (PBOC), which sets a midpoint value against the US dollar every day. The price of the yuan is then allowed to trade within 2% of that price.

The RMB has historically been undervalued against the US dollar, giving Chinese exports an unfair price advantage. In 2015, the PBOC enacted a surprise devaluation of the yuan, which spooked investors. Since then, the central bank has been more cautious with how it manages the currency, but the yuan has generally continued to decline in value against the dollar. In 2015, the price of a dollar was around 6.20 yuan, while in 2024, more than 7.20 yuan are needed to buy a dollar.

The RMB is gaining greater acceptance worldwide, due in part to the Chinese government seeking a larger role in global economic affairs. The International Monetary Fund (IMF) added the Chinese renminbi to its list of reserve currencies, allowing it to be used more frequently in global trade and international financial transactions. However, the Chinese government still closely manages the value of the yuan and has capital controls in place, preventing Chinese citizens from moving money out of the country.

The RMB is one of the top five most-used currencies in the world, alongside the US dollar, euro, yen, and British pound. The exchange rate of the RMB can fluctuate, and investors can take advantage of these movements by investing in funds that hold the Chinese yuan, buying yuan futures contracts, or opening savings or deposit accounts denominated in yuan.

RMB investment risks

As of 2017, it is illegal for citizens in China to exchange renminbi (RMB) for cryptocurrency. This has caused the volume of direct transactions between the RMB and Bitcoin to plummet. As a result, investors who wish to invest in cryptocurrency may be incentivised to use over-the-counter (OTC) and peer-to-peer (P2P) exchanges, which are harder to regulate.

The Chinese government still controls and closely manages the value of the yuan and has capital controls in place. These controls prevent Chinese citizens from moving money out of China and also cause problems for the businesses of foreign companies and investors.

The Chinese economy is facing a number of challenges, including one of the world's worst demographic situations, high debt, a real estate crisis, slumping foreign investor confidence, and declining consumer confidence at home.

The yuan is carefully managed within a range by the Chinese government. In 2015, the People's Bank of China enacted a surprise devaluation of the yuan, which spooked investors. Although the central bank has since become more careful with how it manages the currency, the yuan has generally continued to decline in value against the dollar.

The digital yuan is seen by some as a form of Chinese government surveillance and control over users and their financial transactions. It has been suggested that the digital yuan will allow the Chinese government to monitor its people and financial transactions more closely.

RMB-linked deposits

As China's economy continues to grow, investors are increasingly looking for ways to gain exposure to the Chinese currency. One option is to open a savings or deposit account denominated in yuan. This can be done through banks such as RMB Private Bank, which offers a range of investment deposits structured to complement and balance an investment portfolio, while helping investors achieve their overall wealth goals. These include return and capital-protected deposit options that enable investors to access their funds when needed. Similar services are offered by Standard Chartered Bank (Hong Kong), which provides RMB deposit services with a minimum account opening balance of RMB1,000 for a statement savings account or RMB10,000 for a passbook savings account.

Another option for investing in the yuan is through exchange-traded funds (ETFs) or exchange-traded notes (ETNs) designed to mirror the performance of the Chinese currency. However, it is worth noting that many ETFs and ETNs offering exposure to the yuan have been liquidated and delisted in recent years, making this option less accessible than it once was.

For those seeking to maximise their investment in the yuan through leveraged investments, currency futures or forex market trading may be worth considering. These types of investments use borrowed funds to enhance gains or returns but come with a higher level of risk.

Onshore and offshore prices

The renminbi (RMB) is the official name of China's currency, and the Chinese yuan (CNY) is another name for it, serving as the principal unit of RMB. The two names, renminbi and yuan, are interchangeable.

There are two types of renminbi: onshore yuan (CNY) and offshore yuan (CNH). The onshore yuan (CNY) is used in mainland China and is controlled by the Chinese government, which aims to empower trade between Chinese companies and maintain a favourable value of the yuan. The yuan is used mainly for interbank settlements and when corporations sell and buy FX for business purposes.

The offshore yuan (CNH), on the other hand, is traded outside mainland China in offshore markets like Hong Kong, Macau, and Singapore. It is controlled by the free market, which determines its value through supply and demand. The CNH was created to allow the yuan to be traded freely in international markets.

While the onshore yuan (CNY) and offshore yuan (CNH) are valued at the same amount in renminbi and can be exchanged at a 1:1 ratio, they are not the same currency. They are exchanged at different amounts, regulated by separate authorities, traded at different prices, and have different levels of restrictions.

For example, the onshore yuan (CNY) is regulated by the People's Bank of China (PBOC) and the State Administration of Foreign Exchange (SAFE), which sets a daily reference rate that can only fluctuate within a 2% range. On the other hand, the offshore yuan (CNH) is regulated by the Hong Kong Monetary Authority and is allowed to float freely according to market forces.

The distinction between the onshore and offshore yuan is crucial for businesses and investors dealing with China. The onshore yuan is used for all transactions in the local economy, and there is generally no need to acquire it unless a company is doing business directly in mainland China. This isolation from speculative currency flows allows the PBOC to maintain control over currency price fluctuations.

The offshore yuan (CNH), on the other hand, is used for speculative purposes and trading CNH-denominated financial instruments in financial centres like Hong Kong. While there is currently no price differential between CNY and CNH, during times of economic stress, such as in 2019, spreads of one to two per cent have occurred, requiring intervention by the PBOC.

RMB exchange rate policies

China has a strictly controlled currency policy, where it regulates trading activity and tries to control the daily movements of the yuan on the forex market. Every morning, the People's Bank of China (PBOC) sets a "band" within which the yuan's value is only allowed to move 2% up or down. This is unlike many of its international trade partners, who allow the values of their currencies to float freely.

China has historically had reasons for wanting to keep its currency on a tight leash. When the country first opened its economy in the 1970s and 1980s, it kept the yuan artificially low to make its growing export industry more competitive against Asian rivals. Another reason is stability. China avoided the worst of the Asian Financial Crisis in the late 1990s because it was largely shut off to foreign investors.

China has also taken steps towards liberalising its currency policy. In 2005, it introduced a narrow trading band of +/-0.3%, which gradually widened to +/-2% by March 2014. In August 2015, it allowed its currency to devalue outside of the previous trading band, taking into account the influence of the market.

China has maintained strict rules for individuals and banks holding foreign currency, and the yuan is not yet considered fully convertible. Investors who exchange dollars or other foreign currencies for yuan must sell them directly to the PBOC, which incorporates them into the country's foreign reserves. The PBOC then prints local money for use by individuals, companies and banks.

The central bank sets interest rates to help guide the economy, which can also influence the value of the currency. It also dictates how much cash Chinese banks must keep in reserve and uses other tools such as derivative contracts to influence the market and the value of the currency.

Despite alterations in currency policy, some analysts estimate that the yuan may still be overvalued by as much as 10%. China has begun selling some of its stockpile of US Treasury bonds as part of its efforts to shore up the yuan.

Monetary policy is another mechanism that affects China's currency inflows and prices. Following its initial liberalisation of currency policy in 2005, the Chinese central bank maintained higher interest rates. However, in 2014, the bank began easing local interest rates to counteract a slowing economy, which had the effect of discouraging foreign currency inflows and putting pressure on the yuan.

China wants markets to eventually play a far greater role in determining its currency's value. However, it has been a gradual process. Over the past decade, a market has grown for investors to buy and sell a more freely traded version of the currency in financial centres outside mainland China, such as Hong Kong, London and New York. But its value is still strongly linked to the yuan's price inside China.

Other initiatives, such as stock- and bond-trading links with Hong Kong, have made it easier for foreign investors to buy and sell assets priced in yuan.

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