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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.
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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.
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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).
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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.
2024 was a landmark year for bitcoin, solidifying its role as a fully institutionalised asset class.
Institutional inflows into physical bitcoin exchange-traded products (ETPs) reached nearly $35 billion globally, signalling a major shift in how traditional investors view crypto. As bitcoin continued to enhance portfolios’ risk-return profiles, more institutional investors followed suit, reshaping the financial landscape.
Looking ahead, 2025 promises to bring exciting developments across the crypto ecosystem. Here are the top five crypto trends to watch.
Fear of being left behind
The era of bitcoin as a niche investment is over. Institutional adoption is creating a ripple effect, forcing hesitant players to reconsider. Portfolios with bitcoin allocations are consistently outperforming those without, highlighting its growing importance.
Figure 1: Bitcoin in a multi-asset portfolio
| 60/40 Global Portfolio | 1% Bitcoin Portfolio | 3% Bitcoin Portfolio | 5% Bitcoin Portfolio | 10% Bitcoin Portfolio | MSCI AC World | Bloomberg Multiverse | Bitcoin | |
| Annualised Return | 5.77% | 6.46% | 7.83% | 9.20% | 12.57% | 9.07% | 0.56% | 56.24% |
| Volatility | 8.79% | 8.86% | 9.14% | 9.62% | 11.42% | 13.94% | 5.05% | 67.28% |
| Sharpe Ratio | 0.48 | 0.55 | 0.68 | 0.79 | 0.96 | 0.54 | -0.20 | 0.81 |
| Information Ratio | 1.01 | 1.01 | 1.01 | 1.00 | ||||
| Beta | 70% | 71% | 73% | 75% | 81% | 100% | 24% | 181% |
Source: Bloomberg, WisdomTree. From 31 December 2013 to 30 November 2024. In USD. Based on daily returns. The 60/40 Global Portfolio is composed of 60% MSCI All Country World and 40% Bloomberg Multiverse. You cannot invest directly in an index. Historical performance is not an indication of future performance and any investment may go down in value.
With bitcoin’s ability to noticeably improve portfolios’ risk-return profiles, asset managers face a clear choice: integrate bitcoin into multi-asset portfolios or risk falling behind in a rapidly evolving financial landscape. In 2025, expect the competition to heat up as clients demand exposure to this powerhouse cryptocurrency.
Expanding crypto investment options
In 2024, regulatory breakthroughs opened the doors for physical bitcoin and ether ETPs in key developed markets. This marked a critical step towards making cryptocurrencies mainstream, providing seamless access to institutional and retail investors alike.
Figure 2: Global physical crypto ETP assets under management (AUM) and 2024 net flows
Source: Bloomberg, WisdomTree. 02 January 2025. Historical performance is not an indication of future performance and any investment may go down in value.
In 2025, this momentum is expected to accelerate as the crypto regulatory environment becomes more friendly in the United States and as key developed markets follow Europe’s lead and approve ETPs for altcoins such as Solana and XRP. With their clear utility and growing adoption, these altcoins are strong candidates for institutional investment vehicles.
This next wave of altcoin ETPs will expand the diversity of crypto investment opportunities and further integrate cryptocurrencies into the global financial system.
The maturing of Ethereum’s layer-2 ecosystem
Ethereum’s role as the backbone of decentralised finance (DeFi), non-fungible tokens (NFTs), and Web3 is unmatched, but its scalability challenges remain a hurdle. Layer-2 solutions—technologies such as Arbitrum and Optimism—are transforming Ethereum’s scalability and usability by enabling faster, cheaper transactions.
In 2025, Ethereum’s recent upgrades, such as Proto-Danksharding (introduced in the ‘Dencun’ upgrade), will drive layer-2 adoption even further. Innovations like Visa’s layer-2 payment platform leveraging Ethereum for instant cross-border transactions will underscore the platform’s evolution.
Expect Ethereum’s layer-2 ecosystem to power real-world use cases ranging from tokenized assets to decentralised gaming, positioning it as the infrastructure of a truly scalable digital economy.
Stablecoins: bridging finance and blockchain
Stablecoins are becoming indispensable to the global financial system, offering the stability of traditional assets with the efficiency of blockchain. Platforms such as Ethereum dominate the stablecoin landscape, hosting stablecoin giants Tether (USDT) and USD Coin (USDC), which facilitate billions in daily transactions.
Figure 3: Key stablecoin chains
Source: Artemis Terminal, WisdomTree. 05 January 2025. Historical performance is not an indication of future performance and any investment may go down in value.
As we move into 2025, stablecoins will increasingly interact with blockchain ecosystems such as Solana and XRP. Solana’s high-speed, low-cost infrastructure makes it ideal for stablecoin payments and remittances, while XRP Ledger’s focus on cross-border efficiency positions it as a leader in global settlements. With institutional adoption rising and DeFi applications booming, stablecoins will serve as the backbone of a seamless, interconnected financial ecosystem.
Tokenization: redefining ownership and revolutionising finance
Tokenization is set to redefine how we think about ownership and value. By converting tangible assets like real estate, commodities, stocks, and art into digital tokens, tokenization breaks down barriers to entry and creates unprecedented liquidity.
In 2025, tokenization will expand dramatically, empowering investors to own fractions of high-value assets. Platforms such as Paxos Gold and AspenCoin are already showcasing how tokenization can revolutionize markets for gold and luxury real estate. The integration of tokenized assets into DeFi will unlock new financial opportunities, such as using tokenized real estate as collateral for loans. As tokenization matures, it will transform industries ranging from private equity to venture capital, creating a more inclusive and efficient financial system.
For the avoidance of any doubt, tokenization complements crypto by expanding the use cases of blockchain to include real-world applications.
Looking ahead
2025 is set to be a defining year for crypto, as innovation, regulation, and adoption converge. Whether it is bitcoin cementing its position as a portfolio staple, Ethereum scaling for mainstream use, or tokenization unlocking liquidity in untapped markets, the crypto ecosystem is poised for explosive growth. For investors and institutions alike, the opportunities have never been clearer or more compelling.
This material is prepared by WisdomTree and its affiliates and is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of the date of production and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and non-proprietary sources. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by WisdomTree, nor any affiliate, nor any of their officers, employees or agents. Reliance upon information in this material is at the sole discretion of the reader. Past performance is not a reliable indicator of future performance.
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