In the 21st century, the Chinese economy has blossomed into an economic powerhouse with massive influence over global markets, and its currency is numerical proof of that.
The Renminbi (RMB), or the Chinese Yuan, has been getting stronger and stronger compared to the United States dollar, especially in the last year.
In this blog post, we’ll discuss how the RMB has made such strides in value over the years, and explore possibilities for RMB’s value moving forward.
The History of the Renminbi
The Chinese economy as we know it today began in 1978 during China’s sweeping economic reform.
At this time, China was departing from a government-planned communist economic model to a more market-oriented economy.
This reform process was incremental, as the Chinese government did not want to abandon communism, but to increase its efficiency by dramatically increasing the role of natural market mechanisms.
It goes without saying that this reform was largely successful for the Chinese economy.
Since China’s implementation of economic reforms in 1978, the country’s GDP grew at a rate of roughly 10% per year.
As of 2021, China’s GDP is $14.34 Trillion USD, which is the second-highest GDP behind the United States’ $21.43 Trillion USD.
While the United States holds a firm lead against China, the GDP growth rate of these countries is a mismatch in China’s favor.
The United States has an average GDP growth rate of 2.2% per year, while China boasts a 6.1% average annual growth rate.
If this trend continues, China will soon surpass the United States for the #1 GDP in the world.
China has developed a firm grasp on the world economy as the number one manufacturer of chemical fertilizers, cement, and steel.
By plurality, China has the world’s largest manufacturing sector in the world, producing 28.7% of global products in 2019.
From this information, it looks like the Chinese economy, and the RMB by extension is an unstoppable force that will keep growing at breakneck speeds. But is this true?
Let’s speculate how the RMB will perform in the future.
The RMB Now
The Renminbi is the official currency of China, but the official unit of monetary measure of the Chinese economy is the Yuan.
As of now, the Chinese Yuan is creeping up to the United States dollar’s value. In January of 2020, one U.S. dollar was worth roughly seven Chinese RMB.
As of May 2020, that same single U.S. dollar would be worth less than six and a half Yuan.
While this may not seem like a significant jump in value, the trend is very significant.
So why is this increase in the Yuan happening?
What does it mean for the Chinese economy?
There are a number of factors that are increasing the Yuan’s value.
Let’s take a look at some of them:
- Interest Rates: At the moment, Chinese assets are offering much higher interest rates than their the United States and European counterparts. China’s high interest rate attracts foreign capital, which will, in turn, drive up the Yuan’s value.
- Investor Interest: Additionally, international investors have taken notice of China's “laissez-faire” approach to their currency increasing in value. This opens the door for investors to bet on the Yuan’s value increasing, which will, in turn, further increase the value of the currency.
- Comparative Advantage: The other side of the Yuan’s rise is the fall of the United States dollar. Risk assets play a large role in this factor, as a weaker dollar benefits risk assets when liquidity is high and dollars are easily accessible. Additionally, if the United States dollar falls while the Chinese Yuan rises, the Yuan will comparatively look like it is skyrocketing.
The way things are moving now, the Yuan is on its way to equal the United States dollar in the near future.
But are these trends going to continue?
Will the Yuan be able to surpass the global reserve currency? What incentives guide the valuation of the Chinese RMB?
The Yuan Moving Forward
So how will the Yuan perform moving forward?
According to Trading Economics, the Yuan is expected to trade at anywhere between 6.58 and 7.01 by the end of 2022.
In fact, we do not expect the value of the Yuan to increase moving forward.
In June of 2021, CNBC reported that the Chinese government is attempting to reign in the value of the Yuan for economic advantages.
As of June 2021, the Yuan fell below 7 Yuan to 1 USD.
This is the lowest the Yuan has fallen since 2008.
This is most likely a response to the trade tensions between the United States and China.
One additional major factor that influences currency value is the ripple effect felt by the world economy due to such value changes.
In the case of the Yuan, use this as a simple rule of thumb: a weaker Yuan will be deflationary, and a stronger Yuan is inflationary.
If the Yuan continues to increase in value, the prices of Chinese exports will increase, causing inflation.
If the Yuan decreases in value, Chinese exports will become more competitive.
This makes Chinese exports cheaper for buyers with foreign currencies.
The aim of the Chinese government when devaluing their currency is to offset the effects of higher US tariffs on Chinese imports.
Additionally, a weaker Yuan will make imports more expensive for the Chinese, which could potentially cause inflation in China.
The way that the Yuan swings in the near future have major implications for the world economy, which is why it’s so important to keep track of its value. It’s also to keep tabs on financial news coming out of China.
So will the RMB continue to appreciate against other currencies?
The answer is likely no. If trade tensions between the United States and China persist, the Chinese government is incentivized to devalue their currency to offset the effects of US tariffs against Chinese exports.
The RMB may not appreciate in the long run, but in short, focused spurts of appreciated value, your business can find opportunities when dealing with Chinese suppliers.
Because Chinese suppliers often would prefer to be paid in RMB while it's appreciated.
If you can wield the power of the RMB as a payment currency when dealing with suppliers, you'll find your negotiations will go a lot smoother.
To make this power a reality for your business, consider buying RMB while booking the best prices on the forex market using Statrys.
We'll help you book the best rates and avoid currency uncertainty before you next need to deal with suppliers in China.