US & World Economies World Economy China's Currency, the Yuan, and How It Affects You Find out how the monetary system in China can impact you By Kimberly Amadeo Updated on April 29, 2022 Reviewed by Charles Potters In This Article View All In This Article What Is the Yuan or Renminbi? How Yuan, Dollar Affect Each Other Is China a Currency Manipulator? How Does the Yuan Affect You? How Can I Invest in Chinese Currency? Frequently Asked Questions (FAQs) Find out how the monetary system in China can affect you. Photo: belekekin/Getty Images China’s currency, the renminbi or yuan, is tied to the U.S. dollar, the currency of China’s largest trading partner. China does this to hedge against risks in changes to the dollar’s value. China also has been accused of deliberately keeping the yuan’s value low to depress its export prices, but currency manipulation is difficult to prove. What Is the Yuan or Renminbi? China’s currency is called the "yuan" or "renminbi." The terms have slightly different usages. Renminbi means “people’s currency” and describes Chinese currency in general. The yuan is a unit of measure. One good way to think of the difference is "cash" versus ”dollars.” How the Yuan and Dollar Affect Each Other China used to peg its currency to the U.S. dollar (USD), its largest trade partner. It now manages its exchange rate against a basket of currencies from its largest trading partners, weighted by the amount of trade they do with each. Currently, the USD still has the largest weighting in that basket. Note The dollar is used for most international trade transactions. It’s been the world's reserve currency since the 1944 Bretton Woods Agreement. The People's Bank of China (PBOC) manages the yuan’s value so that it rises and falls along with the dollar. The dollar's value fluctuates because it’s on a floating exchange rate. China switched from a strictly fixed exchange rate in July 2005. So its currency is now more flexible but is still managed with a close eye. How China Accumulates Dollars China's exporters receive dollars when they ship goods to the U.S. They deposit them into their local banks. The bank pays them renminbi in return, which they use to pay their workers and local suppliers. The local banks then transfer dollars to the central bank. It uses the dollars to purchase U.S. Treasury bonds, which pay interest. As a result, China has become one of the largest foreign holders of U.S. Treasurys. How China’s Central Bank Manages the Yuan The PBOC monitors the yuan’s value relative to the dollar. If the dollar rises too far above the peg, the bank will sell Treasurys on the secondary market. By adding to the supply of Treasurys for sale in the market, their value drops, along with the value of the dollar. It also gives the PBOC cash to purchase more yuan, raising the currency’s value. Why Is China Accused of Currency Manipulation? Any country that keeps its currency artificially low to boost cheap exports can be accused of currency manipulation. Countries with low currency values export more because their products cost less than their competitors’ products. Currency manipulation is difficult to prove. A fixed exchange rate, by its very nature, exposes a country to accusations of currency manipulation. To make its case, the accusing country must prove that the accused kept its currency low simply to increase exports. In August 2019, the U.S. designated China as a “currency manipulator.” According to the U.S. Treasury Department, China has a history of undervaluing its currency to gain an unfair competitive advantage. Since 2014, when the yuan reached an 18-year high, China has been lowering the value of its currency. There are many reasons for that. In 2014, the dollar rose 15% against most major currencies, dragging the yuan up with it. As a result, the yuan was overvalued compared with other trading partners not pegged to the dollar. In 2015, the International Monetary Fund (IMF) designated the yuan as an official reserve currency. The IMF required the yuan to be more driven by market forces. As China relaxed controls, the yuan experienced greater market volatility. But the yuan didn’t rise, as many thought it would. It fell, indicating that the market thought the yuan was overvalued. In 2019, China lowered the yuan’s value. It might have been trying to offset the rising cost of tariffs imposed by President Trump's trade war. Later that year, the U.S. made its declaration about China being a currency manipulator. How Does the Yuan Affect You? When the yuan’s value is low, it reduces the prices of many products imported in the U.S. and other countries from China, which can be seen as positive by consumers. The biggest categories are computers, cell phones, apparel, and toys/sporting goods. Low import prices also minimize the threat of inflation. A low yuan value is one reason for the large U.S./China trade deficit. The other reason is that China can pay its workers less than U.S. companies can because China’s cost of living is lower. China’s demand for Treasurys helps keep U.S. interest rates low. That boosts the U.S. economy by lowering the cost of loans and allowing Congress to increase federal spending. China’s peg also influences the value of the U.S. dollar. When China’s central bank sells Treasurys, it lowers the dollar’s value by increasing the supply of dollar-denominated assets. Note Some alarmists say that China could sell enough Treasurys to trigger a dollar collapse. A dollar collapse won’t likely happen, however, because it's not in China's best interests. Selling a big chunk of Treasurys would quickly devalue China’s own remaining holdings. Even so, it's unwise for the U.S. to allow itself to become so indebted to any other country. How Can I Invest in Chinese Currency? Investing in Chinese currency is unnecessary because it is still loosely tied to the dollar. If the yuan rises, it’s only because the dollar has, too. There is an additional risk added in by the Chinese government. It could modify the value of the yuan for political reasons. This is difficult to anticipate and, therefore, profit from. If you are traveling to China, you may be concerned that the currency could rise before your trip. Investment in a currency fund would offset this risk. If the yuan were to rise, so would your investment. This would offset higher costs from your anticipated trip. Here are two popular Chinese currency ETFs: WisdomTree Chinese Yuan Strategy Fund (CYB) Market Vectors Chinese Renminbi/USD ETN (CNY) Frequently Asked Questions (FAQs) Are the yuan and renminbi the same? To most people, the yuan and renminbi are essentially the same. The words can be used interchangeably in casual conversation. Technically, the yuan is a unit of measurement for the renminbi. It's similar to how the British currency is the "pound sterling," but prices are typically stated in "pounds." What is the Chinese currency backed by? As a fiat currency, the yuan is ultimately backed by faith in the Chinese government. China's central bank holds trillions of dollars worth of reserves, including foreign exchange and gold reserves. Was this page helpful? Thanks for your feedback! Tell us why! Other Submit Sources The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy. The World Bank. "China Exports, Imports, and Trade Balance by Country 2017." Board of Governors of the Federal Reserve System. "Foreign Exchange Rates - H.10: Historical Rates for the Chinese Yuan Renminbi." The Brookings Institution. "What's the Difference Between the Renminbi and the Yuan? The Answer To This and Other Questions in 'Renminbi Internationalization.'" The World Bank. "Total Reserves (Includes Gold, Current U.S.$) - China."