China’s national currency can be confusing. This article was written as an internal explainer for our team, but we decided it may have broader appeal so have reproduced it here! Hope you find it useful!
So how many currencies does China have?
Chinese currency is officially called the renminbi, or RMB (which is pinyin of the Chinese 人民币 — “the people’s money”). The currency’s unit of account ¥ is called the Chinese yuan. And to complicate the matters even more, there are two kinds of Chinese yuan: offshore and onshore.
Offshore yuan is allowed to trade freely on foreign currency markets, but onshore yuan trading is controlled tightly by the Chinese central bank (the People’s Bank of China, PBOC). Effectively, this makes the renminbi inside of China (CNY) a wholly different currency to the Renminbi outside of China (CNH), with each trading at different rates.
CNY and CNH both have their own separate buy, sell and mid-market rate.
What is the CNY rate?
Each weekday morning the PBOC sets a rate for CNY. The market within China is then allowed to trade within 2% of this value. It is important to note that the rate set by the PBOC is not the mid-market rate and is not the rate at which currency can be exchanged.
What is the CNH rate?
CNH’s rate is not controlled. Its rate is decided almost entirely by the FX markets. But due to PBOC’s massive influence, this rate tends to stay within close range of the domestic CNY rate.
The CNY rate at any time can be either below OR above the CNH rate.
Latest USDCNY rate on Hexun (参考价)
Latest USDCNH rate on Bloomberg
Comparing mid-market rates
Using 16th May 2016 as an example, the USDCNY mid-market rate is lower than the USDCNH rate:
USDCNY: 6.6530
USDCNH: 6.6660
Difference: 0.0130 (0.20%)
This means that today, USD payments into China converted at the CNH mid-market rate would make more money for the supplier than payments converted at the CNY mid-market rate. This difference (either way) can sometimes increase to as high as 10%.
However, using traditional payment channels, funds are never converted at the mid-market rate (whether converting CNY or CNH rate). They are converted at the provider’s “buy” rate (汇买价).
CNY/CNH buy rates
At domestic Chinese banks, currency is converted at the bank’s CNY buy price–a fixed rate at the time which is generally the same regardless of how much is being converted.
At foreign banks, currency is converted at a buy price which is set according to the amount being converted. Converting larger amounts results in better rates.
At third-party payment providers, they tend to convert according to their own buy price, which may or may not vary depending on the amount of funds being converted.
USDRMB buy rates compared
The table below shows that the currency spread in China is much lower than the spread offered by US banks when converting dollars to yuan. (Spread based on a typical small business payment of under $10,000).
As can be seen in the second table below, the CNH mid-market rate is favourable if converting compared to the CNY mid-market rate. Despite this, the spread charged by most US banks (based on our own experience this is usually ~ 3%) means that it would still better value to convert your USD within China.
The spread between CNH and CNY can of course sometimes go the other way, in which case converting in China will be an even better value proposition.
Why would you ever convert outside of China?
In the face of the above, it’s important to understand that sometimes it is not preferable — or even not possible — to convert your foreign currency in China:
- Unless you have a registered entity in China, you will need to rely on your recipient to perform the conversion.
- Your recipient may be demanding RMB payments
- It sometimes can be too demanding to expect recipient to convert to RMB (collection of foreign currencies and conversion is a fairly hands-on process).
- For small payments, fixed bank fees to send to China can be prohibitive. Using third-party payment options like Remitsy offer a competitive exchange rate with low-to-zero fees for processing.
- By holding RMB, fixing prices in RMB, and paying in RMB, it is possible to better manage currency volatility risk when dealing with Chinese partners. The recipient also no longer has to worry about currency volatility — which can lead to discounts due to their ability to control costs and margins.
Need to make payments in CNY to China (not CNH!), then head to Wyre to learn more!
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Originally published at help.remitsy.com on September 6, 2016.
