Before discussing the currency of modern day China and its derivatives and currency dealings, it is important to delve into this nation's glorious past and understand the root pattern of its currency and finances. China has had a long historical association with monetary development and money printing. It was after all the first civilization to use paper money. It’s said that in the ancient Song Dynasty in China, emperors themselves painted characters on the coins. Times have changed but old habits die-hard it seems as US financial experts have accused the present day Chinese government of not exactly painting dragons and other auspicious patterns but deliberately manipulating its modern day currency. Even as financial experts want the US Treasury Secretary to declare China as a currency manipulator, its also true that equity markets across the world has made handsome gains whenever China has announced plans to make its currency, the yuan, more flexible against the dollar. Before concluding whether China is indeed actively undervaluing its currency or not its important to understand the basic value of the Chinese currency and its formation.
Reality Of The Chinese Currency Drama
China, from its earliest civilizations has always been a clever economy and it's certain that it would not enter into an economic suicide by blindly imitating the west. It is also quite clear that the Chinese government would not allow their currency to go down with the dollar ship as most of the export dependent companies of China which form big chunk of current Chinese economy may lose steam as most of them work on very thin margins. Although economists continue to be skeptical about the goodness of the Chinese currency moves, there is no doubt that China is ready to resume greater flexibility with its yuan.
The Ancient Chinese Currency
China led the ancient world by introducing shells as a medium of exchange and unit of account in commerce but later used other materials like pottery, stone, bone, jade, bronze and gold to make shell-shaped money. The bronze shell-shaped coins heralded the mintage of Chinese coin. It was a great leap in the evolution of Chinese currency. After the Spring and Autumn Period, Chu State (present-day Hubei and Hunan) minted coins with Chinese characters such as dragon , phoenix, tortoise, kylin, double fish, sword, the Eight Diagrams (ba gua), the Chinese zodiac , and the big dipper. China also has the honor of releasing the world's earliest credit money was issued in 119 B.C. Made of white deer hide, this money was colorfully paint and decorated with embroidery. The deer was from the imperial park but this was not the reason why it was worth 400,000. The true reason behind was at the time, the imperial treasury was in deficit but the aristocrats plundered the people mercilessly, to turn the tables, Emperor Wu issued this kind of money to control the fortunes of the rich and to enrich the treasury. This money was not for circulation but for tribute by ministers and kings
Chinese currency has had an interesting history. China began issuing the Yuan in 1897 during the Qing Dynasty. After World War II, government debts caused Yuan hyperinflation under the Nationalist regime. This event, along with military prowess, helped the Communists gain control of the country in 1949. Although several regional banks were established, they were united in December 1948 as the People's Bank of China. Established in Shijiazhuang, the new bank took over currency issuance in areas controlled by the Communist Party.
After the promulgation of the People's Republic of China, there was a brief period where 100,000 Gold Yuan could be exchanged for 1 Yuan Renminbi. Renminbi notes were issued in 12 denominations: 1, 5, 10, 20, 50, 100, 200, 500, 1000, 5000, 10000, and 50000 yuan. These denominations were subdivided into 62 styles. After adjusting the currency value with ratio 1:10000 in March 1955, the second edition of Renminbi were issued in 12 denominations, including 1 fen, 2 fen, 5 fen, 1 jiao, 2 jiao, 5 jiao, 1 yuan, 2 yuan, 3 yuan, 5 yuan and 10 yuan.
The People's Republic of China began issuing aluminum coins in December 1957, in denominations of 1, 2 and 5 fen. From 1961, China outsourced the printing of 3, 5 and 10 yuan notes to the Soviet Union. The fifth and latest editions of the currency of the People's Republic of China have been produced since 1 October 1999. Notes have been produced in 8 denominations: old types of 1 fen, 2 fen and 5 fen, as well as new issues depicting Mao Zedong: 5 yuan, 10 yuan, 20 yuan, 50 yuan and 100 yuan. In 2004, a 1 yuan note depicting Mao Zedong first came into production. Since 1999, coins have been produced in denominations of 1 fen, 2 fen, 5 fen, 1 jiao, 5 jiao and 1 yuan.
Foreign Exchange Certificates
The Bank of China on the Mainland was chartered as the main foreign trade and exchange bank. Foreign visitors to China were required to conduct transactions with Foreign Exchange Certificates issued by the Bank of China between 1979 and 1994. These have been abolished, and all transactions now occur in Renminbi. A lot of U.S. news commentary and pundits appear to use the words “yuan” and “renminbi” interchangeably to refer to China’s currency, but the fact is that these terms are not simply interchangeable. It is not like using the words “greenback” and “dollar” to refer to USD – and it is not like the difference between “apple” and “Pink Lady.”
Difference Between The Yuan And The Renminbi
The Renminbi (RMB) is the proper name for the Chinese currency as such. Loosely translated it is supposed to mean something like “the people’s currency” or “the people’s money.” Please don’t get caught up trying to attach political connotations to that (remember, US currency is also full of all that “In God We Trust” posturing). The Renminbi distinguishes China’s currency from Korea and Japan, but also from Taiwan, Hong Kong and Macau.
By contrast, “yuan” refers to a unit of measure of the renminbi – but also, more importantly, it refers to a unit of currency in general, so when some Chinese speak of the American dollar they might say “mei yuan” (or “mei jin” in Mandarin; U.S. gold is called “mei gum“). Taiwanese can refer to their own currency in yuan; even though it is a different currency than China’s.
Investment Strategy For When the Renminbi Becomes a Reserve Currency
In many ways “yuan” is like the word “dollar” – except that what we do to distinguish among “dollars” is just add the nationality: Canadian dollar, American dollar, Australian dollar, New Zealand dollar. So just keep in mind that “yuan” is a general term – both Chinese and Taiwanese use it to refer to their currency, even though they are different currencies. If you like, think of it like saying “bucks” – it is just a general, although not quite slang, term. It would probably be more appropriate to at least distinguish between “Chinese yuan” and “Taiwanese yuan,” etc.
Whenever you want to talk about currency movements, purchasing Chinese currency, or, especially, distinguishing particularly Chinese currency from a group – use the word Renminbi. Yuan is a slightly more ambiguous, if not completely inaccurate, term.
Investing In China Currency Funds
For investors who want to invest in currency in the emerging Chinese market, a favorite investment vehicle continues to be the WisdomTree Dreyfus Chinese Yuan Fund (CYB). The ETF seeks to achieve total returns reflective of both money market rates in China available to foreign investors and changes in value of the Chinese Yuan relative to the U.S. dollar. The fund normally invests in a combination of U.S. money market securities with forward currency contracts and currency swaps that are designed to create a position economically similar to a money market security denominated in Chinese Yuan. The average portfolio maturity is 90 days or less. It does not purchase any money market securities with a remaining maturity of more than 397 calendar days. The fund is non-diversified.
A point to remember is that Chinese laws prevents the funds from directly investing in the renminbi, so they hold currency derivatives known as non deliverable forwards. These are similar to futures contracts, which reflect a market’s expectations. As a result the WisdomTree Dreyfus Chinese Yuan Fund (CYB) might not perfectly track the yuan.
Unlike other major currencies, the Yuan can’t be traded on the Forex market. WisdomTree’s CYB ETF is an actively managed ETF currently holding a compilation of futures contracts and swaps with different maturities that seeks to mirror the money market securities denominated in the Chinese Yuan. The fund has no current yield, so it is strictly an appreciation play versus the U.S. dollar.
CYB Issuer: Wisdom Tree
CYB Performance
52 Week Return: -1.38%
YTD Return: -0.79%
1 Week Return: 0.28%
2 Week Return: 0.48%
4 Week Return: 0.64%
13 Week Return: -0.75%
26 Week Return: -1.26%
CYB Expenses & Fees
* Expense Ratio: 0.45%
* Category: Currency
* Category Range: 0.35% to 0.89%
* Category Average: 0.5%
Another key instrument to bet on China’s currency, the renminbi (also called the yuan) is the Market Vectors Chinese Renminbi/USD ETN (CNY). The ETN is an unsecured debt security issued by Morgan Stanley that is linked to the S&P Chinese Renminbi Total Return Index. The ETN seeks to track the performance of the Chinese Renminbi against the US Dollar by investing in rolling three-month non-deliverable currency forward contracts. The annual expense ratio is 0.55 percent and the ETN doesn’t currently pay a dividend.
CNY Historical Quarterly NAV Returns
Q1 Q2 Q3 Q4
2010 -0.17 -0.45 --- ---
2009 0.85 -0.37 -0.02 -0.52
2008 --- -1.21 -1.23 2.03
CNY Performance History upto 07-13-10
2003 2004 2005 2006 2007 2008 2009 YTD
Market Return % --- --- --- --- --- --- 1.88 -0.18
NAV return % --- --- --- --- --- --- -0.07 -0.27
+/- Category (NAV) --- --- --- --- --- --- -12.59 3.70
+/- Index (NAV) --- --- --- --- --- --- -1.06 -0.39
% Rank in Category (NAV) --- --- --- --- --- --- 82 50
However there is one key difference. CNY is actually an exchange-traded note (ETN), not an ETF. Practically speaking, ETNs work much the same way as ETFs, but they’re actually a form of debt instrument. According to the NSX, CYB now has assets of $550 million and has seen trading volumes as high as 1.5 million shares daily. The real upside to these funds is their near-zero correlation to most assets, making them a potentially valuable diversifier. Plus, since it is extremely unlikely that the yuan will lose ground against the dollar–a downward revaluation would spark major outrage from world leaders–the downside to these funds is limited. From a cost perspective, CYB has a slight advantage as the WisdomTree ETF charges 0.45%, 10 basis points less than CNY. Over time the rise of the yuan is inevitable, but investors will have to be patient and consider the other factors that may influence the price of both CYB and CNY.
Experts however suggest that Beijing uses currency manipulation to maintain the value of its currency, the yuan, at an artificially low value, which makes its exports much cheaper and its imports more expensive. China keeps its currency (yuan) undervalued with respect to the US dollar by buying dollars in the open market. China, which runs a huge trade surplus, can afford to buy dollars in the open market to keep the demand for dollars high, and push the dollar price upwards relative to the yuan. This keeps the yuan undervalued.
No matter which side of the fence you are in, the WisdomTree Dreyfus Chinese Yuan Fund (CYB) and Market Vectors Chinese Renminbi/USD ETN (CNY) are very good options to enter the Chinese currency segment. So if long-term rewards are what you’re looking for, China represents an amazing investment opportunity.
Disclosure: No Positions
