China’s two Currencies

https://upload.wikimedia.org/wikipedia/en/2/22/Renminbi_banknotes.JPG
The Renminbi

It was only today that I learned that China, in effect, has two different currencies. I’m not even trying to get the nomenclature right, but the relevant terms are Yuan and Renminbi and they both somewhat overlap in meaning.

What makes China’s system a dual currency system is that they have a separation between onshore currency (that can only be used on the mainland) and offshore currency (used for international transactions, but not on the mainland). The exchange rate between the two is essentially fixed by the People’s Bank of China. This allows, at least in theory, for some nice trickery.

Fixing the exchange rate

Most of the money that circulates is onshore money, the offshore money available is roughly in the order of magnitude of 1% of that. There is simply relatively little of it available, and it is mostly under Chinese control. Increasing or decreasing the supply of offshore money therefore has a strong effect on the exchange rates with other international currencies. This makes it very easy to artificially appreciate or depreciate the offshore currency. States have controlled their currencies in the past. If a state wants to depreciate its currency, all it has to do is to increase the supply of it. But that of course affects your own citizens as their money loses value as well. For the Chinese, these two things are somewhat decoupled. By keeping onshore money and offshore money separate, the could essentially fix the price of their offshore money without having to temper with their onshore money at the same time.

Now the above is obviously a gross simplification of the real world (and I am happy if it is more than 90% correct). If you are interested in this I recommend this very fascinating Twitter thread or read this blog post by the same author.

Leave a Reply

Your email address will not be published. Required fields are marked *