Yuan vs. Renminbi: An Overview

Chinese currency is a hot topic these days for many reasons. Not only does it define the state of one of the world's biggest economic superpowers, but it is also central to one of the most debated issues involving China today—its perceived mercantilist policy of artificial undervaluation of its currency against the U.S. dollar to give its exports an unfair price advantage.

There had been a consensus among economists that the Chinese currency has been undervalued in the 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.﻿﻿

Chinese money, however, comes by two names: the Yuan (CNY) and the people's renminbi (RMB). The distinction is subtle: while renminbi is the official currency of China where it acts as a medium of exchange, the yuan is the unit of account of the country's economic and financial system.

1:02 Yuan Vs RMB: Understanding The Difference

Money As a Medium of Exchange

Money enables anyone who possesses it to participate as an equal market player. When consumers use the money to purchase an item or service, they are effectively making a bid in response to an asking price. This interaction creates order and predictability in the marketplace. Producers know what to produce and how much to charge, while consumers can reliably plan their budgets around predictable and stable pricing models.

When money, as represented by a currency, is no longer viable as a medium of exchange, or if its monetary units can no longer be accurately valued. Consumers lose their ability to plan budgets, and there is no longer a way to gauge supply and demand accurately. In short, market volatility will cause the markets to become chaotic.

Prices are bid up or raised, in response to worries about scarcity and fears of the unknown. Meanwhile, supply diminishes because of hoarding behaviors, coupled with an inability of producers to quickly replenish inventory.

Money as Unit of Account

Unit of account (or numeraire) is an economic term that represents a unit in which prices are measured. A numeraire is usually applied to a single good, which becomes the base value for the entire index or market. By having a numeraire, or base value, it allows us to compare the value of goods against each other. In essence, the numeraire acts as a set standard of value across an exchange.

An example of a numeraire arises when we look at how currencies were valued under the Bretton Woods Agreement and System during the mid-twentieth century. The U.S. dollar (USD) was fixed at $35 per ounce of gold. All other currencies were then priced as either a multiple or a fraction of the dollar.﻿﻿ In this situation, the USD acted as the de facto benchmark, or numeraire, because it was fixed to the price of gold.

Today, the U.S. dollar remains the numeraire for most commodity prices. Denominating commodity prices in the U.S. dollar standardizes the price as the USD is the most-traded and liquid currency in the world. For example, companies that engage in oil transactions can easily convert payments or receipts in a timely manner since the price of oil is denominated in USD.

CNY vs. RMB: Key Differences

With 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 (RMB), or both?

Renminbi is the official currency of the People's Republic of China, and means "people's currency" in Mandarin. The yuan is a unit of the currency. Renminbi and yuan are often used interchangeably.﻿﻿ The communist party established the People’s Bank of China and issued the first RMB in December 1948, about a year before it defeated the Kuomintang government.﻿﻿ Though the official abbreviation is CNY, the abbreviation as RMB is common, too. When shopping in China, a storekeeper might express prices in terms of kuai, which translates into "pieces," and is similar to how Americans use "bucks" to mean dollars.﻿﻿

Yuan is the unit of account. The largest banknote is 100 yuan, followed by 50 yuan, 20 yuan, 10 yuan, 5 yuan, 2 yuan and 1 yuan. One yuan can be further divided into jiao and fen. There are 10 jiao in a yuan (think dimes in a dollar) and 100 fen in a yuan (think pennies in a dollar). The central bank has issued both coins and notes for jiao and fen, though notes for fen denominations are rare.﻿﻿

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

China's Currency Controversy

In the summer of 2018, the IMF reported that the Chinese yuan was in line with fundamentals, only to then witness the yuan reach a 13-month low in response to an escalating tariff war with the United States.﻿﻿ This drop prompted U.S. Treasury Secretary Steven Mnuchin to comment that the Treasury was “going to very carefully review whether they have manipulated the currency.”﻿﻿

For years, the Chinese yuan renminbi (CNY) had never been close to being considered an international currency because of the Chinese government's rigid controls. However, this then began to change. According to a 2015 report by Standard Chartered Bank, usage of RMB for international trade expanded 21 fold since 2010, and it expected that almost half of China's goods trade would be invoiced in RMB by 2020.﻿﻿

In October 2016, the renminbi was added to the list of the top-five most-used currencies, in addition to the U.S. dollar, euro, yen, and British pound, making it part of the IMF’s Special Drawing Rights Basket—an international reserve asset that the IMF created as a supplement to member countries’ official reserves.﻿﻿

However, data reported by Swift, the global inter-bank system, revealed that only 1.6% of domestic and cross-border payments in December 2017 were denominated in renminbi. Michael Moon of Swift stated, "The renminbi has had a difficult year in 2017 and struggled to realize its potential for growth." Swift's Alain Raes concurred, stating that the use of the currency had remained low and "the pace of adoption remains lower than expected."﻿﻿

The Bottom Line

The growth of Chinese currency is often a roller coaster. China has increased its attempts to back its currency, including promoting free usage of the renminbi. Whether you know it as a yuan or renminbi, what matters is that the currency from China remains a part of the currency conversation on the global stage.