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Chinese Renminbi, The Basics
ETF Securities Currencies – Chinese Renminbi, The Basics
Summary
The liberalisation of currency controls and the growth of the “Dim-sum” bond market have seen the global trade of the hinese Renminbi (RMB) soar in recent years.
The RMB has come into sharp focus since last August, where its sudden depreciation generated a severe market selloff.
The RMB is traded on both onshore and offshore markets and rates between the two can differ.
Capital controls currently in place require the use of Non- Deliverable Forwards (NDFs) to gain exposure to the onshore RMB exchange rate for investors.
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A Brief History
Since the development of the Yuan in 1948, Chinese authorities have maintained strict control over its value, pegging it to the US Dollar at various levels to meet economic objectives1. From 1994, the fixed exchange rate regime saw China accumulate a large trade surplus and considerable foreign exchange reserves (see Figure 1) as the undervaluation of the currency kept international exports artificially competitive.
(click to enlarge) 1 A Yuan is a unit of Chinese currency and is to the Renminbi (RMB) what the Pound is to Sterling, so both terms can be used interchangeably.
Unsurprisingly, this policy was unpopular and generated pressure from its primary trading partners, pressure which in 2005 led to a movement towards a “managed floating” exchange rate regime and a removal of the peg. This gave the currency more flexibility but still allowed for government influence on its overall level.
In more recent years, Chinese authorities have altered course and have progressively removed barriers to the free trade of the RMB. These moves have prompted the growing use of the Yuan in international business, with the RMB recently surpassing the Japanese Yen to become the fourth most popular payment currency globally (SWIFT, 2015). In addition, the proliferation of the “Dim-sum” bond market in 2009, which are bonds issued outside of China denominated in RMB have also helped the internationalisation of the currency. Global bodies like the International Monetary Fund (IMF) have also acknowledged the increasingly “free” use of the RMB and have included the Yuan in the valuation of its coveted Special Drawing Rights (SDR) basket in October of last year.
(click to enlarge)
Many faces of the RMB
The global market for the RMB is somewhat segmented and so is quoted in a number of forms.
The RMB is traded both on the onshore Chinese market and on numerous offshore markets in Hong Kong, London, Singapore and New York. On a daily basis the People’s Bank of China (PBoC), the Chinese Central bank, provides a daily fixing (at 09.15 local time) for the onshore rate (CNY) against the a basket of reference currencies, around which the pair can trade within a ±2% band. This onshore market, despite being somewhat liberalised, is still subject to considerable regulation.
The offshore market rate (CNH) is not subject to as strict controls and is ultimately determined by market forces. While the CNY and CNH rates tend to move in tandem, differences in liquidity and capital restrictions on arbitrage prevent this gap from closing permanently (see Figure 2).
Yuan plunges
On August 11th 2015, the PBoC announced that it would modify the mechanism through which the daily Yuan fixing would take place. In attempt to foster a more “market-driven” process, quotes from onshore primary dealers would be used as inputs into the calculation of the fix on a daily basis. That morning, the USD/CNY fix plunged 1.9% and the next day a further 1.0% in response, the largest absolute one day moves since the peg was removed in 2005.
The sharp declines sparked speculation that Chinese authorities were more concerned about domestic growth than previously anticipated and permitted the depreciation to boost the competitiveness of Chinese exports. The Chinese stock market reaction was sharp; with the Hang Seng Index plunging 3% intraday (see Figure 3). The impact was felt globally, with other major equity indices also falling considerably, only to recoup losses in the subsequent trade.
(click to enlarge)
How to trade the CNY
Due to trading restrictions imposed on the CNY, a liquid market for CNY Non-Deliverable Forwards (NDFs) has blossomed. An NDF is a forward contract that fixes the exchange rate for a currency transaction at some point in the future. At expiry the profit/loss of the underlying contract is calculated and converted into US Dollars and settled.
NDF’s evolved out of the necessity for market participants to hedge exposure to currencies such as the CNY, Taiwan Dollar (TWD) and the Brazilian Real (BRL) all of which are subject to capital controls and cannot be physically delivered. Like FX forwards, the rates at which NDFs price is based on expected future interest rate differentials between the two relevant currencies.
When using NDFs, an investor has to “roll” his/her position prior to expiry in order for the currency exposure to be maintained. “Rolling” involves closing out a near term position before it expires and re-investing in a longer dated forward. Like in other asset classes this process can incur a cost/gain depending on the shape of the forward curve. As mentioned previously, interest rate differentials determine forward FX levels and thus dictate the shape of the curve and the corresponding impact of the roll (see Figure 4).
(click to enlarge)
An alternative to investing through NDF’s directly is to utilise currency exchange traded products (ETPs). Currency ETPs provide a transparent, liquid and freely tradable medium through which to gain access to emerging market currency pairs. Currency ETPs trade like shares and mitigate some of the operational complexities involved in investing in NDFs, although indices are priced from NDF’s.
Prospects for the CNY
Chinese authorities continue to manage the nation’s transition from an export and investment led fast growing economy to a more moderate mature consumer driven model. Recent declines in the PBoC’s FX reserves and intervention in the onshore stock market reflect the government’s desire for stability during this period of change. Therefore the possibility of further monetary intervention remains, which, in the near term which could weigh the RMB.
Important Information
This communication has been issued and approved for the purpose of section 21 of the Financial Services and Markets Act 2000 by ETF Securities (UK) Limited (“ETFS UK”) which is authorised and regulated by the United Kingdom Financial Conduct Authority (the “FCA”).
The information contained in this communication is for your general information only and is neither an offer for sale nor a solicitation of an offer to buy securities. This communication should not be used as the basis for any investment decision. Historical performance is not an indication of future performance and any investments may go down in value.
Last week, I was in Washington, DC to attend the DC Blockchain Summit and to meet with regulators and policymakers to share our experiences as a crypto-focused asset manager over the last seven years.
The Summit, hosted by The Digital Chamber, included speeches from dozens of members of Congress, regulators, and industry leaders. After listening to presentations and speaking with a number of regulators and policymakers I have one key takeaway: Regulatory clarity for crypto will come much faster than I previously anticipated.
A dramatic shift in tone
As I wrote in January, US policymakers and government leaders—at nearly every level—are embracing this technology. For years, the lack of clear rules for digital assets in the US has been a major obstacle for institutional investors and financial firms looking to enter the crypto space. However, this past week in DC, as well as several of the conversations I’ve had with advisors and wealth managers over the last several weeks, has left me with an even higher sense of optimism.
One of the most striking takeaways from my meetings was the shift in how policymakers are discussing crypto. Just a year ago, many in Washington viewed digital assets primarily through the lens of risk—concerns over fraud, illicit finance, and speculative volatility dominated the conversation. While these concerns still exist, the discussions now are much more nuanced and focused on the opportunities that crypto can create to the American economy and how to address these risks through a clear regulatory framework.
Bipartisan support for legislation
Perhaps the most encouraging sign is the concrete progress being made on both legislative and regulatory fronts. Several key developments indicate that clearer guidelines for crypto businesses and investors could arrive sooner than expected. There is growing bipartisan momentum behind crypto-related legislation. The House Financial Services Committee and the Senate Banking Committee are moving forward with stablecoin legislation, and it is possible legislation could be signed into law as early as this summer. Stablecoins have also been a key focus of regulatory discussions, with growing consensus that they should be subject to clear guidelines similar to those governing payment systems and money market funds.
House and Senate committees are also actively discussing proposals that aim to define the jurisdiction of regulatory agencies, clarify the status of digital assets, and establish consumer protections. Unlike previous years, these efforts are being taken seriously by both parties, increasing the likelihood of meaningful legislative progress.
Adding to these regulatory discussions is the growing demand for crypto exposure from institutional investors. This demand is influencing policymakers and regulators, as they recognize that a lack of clarity is pushing innovation overseas.
What does this shift mean for investors?
The acceleration of regulatory clarity is a significant development for investors. While the approval of spot bitcoin ETFs last year was a watershed moment, it’s just the beginning. Several large financial institutions, including major banks and asset managers, are actively exploring tokenization, digital asset custody, and blockchain-based financial infrastructure. These institutions are engaging with regulators, advocating for a clear framework that allows them to enter the market with confidence.
Uncertainty has been one of the biggest barriers to broader crypto adoption by financial institutions and institutional investors in particular. As regulations become clearer this year, we expect to see:
• Increased institutional participation: With regulatory uncertainty diminishing, more traditional financial institutions will feel comfortable offering crypto products and using crypto technologies such as stablecoins to offer more efficient services, driving further mainstream adoption.
• Growth in tokenization and blockchain use cases: Clearer regulations will pave the way for asset tokenization, improving efficiency in markets like real estate, bonds, and private equity.
• A stronger US crypto market: By establishing a clear regulatory framework, the US can assert itself as a global financial leader, which we believe will help spur more regulatory clarity in other jurisdictions.
Final thoughts
The message from Washington is clear: crypto regulation is coming, and it’s coming faster than many expected. While there are still hurdles to overcome, the shift from uncertainty to structured regulation is well underway. For investors, this marks an important transition. Clearer rules will reduce risks, enhance market stability, and unlock new opportunities for institutional and retail participants alike.
At Hashdex, we remain committed to navigating these changes and providing investors with access to the best opportunities in this evolving landscape. As we move forward, continued engagement with regulators, policymakers, and financial institutions will be key. The crypto industry has a critical role to play in shaping the future of regulation, and by working collaboratively, we can help ensure that the next phase of crypto’s growth is built on a foundation of clarity and trust.
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