Renminbi

The Renminbi (often abbreviated as RMB) is the official currency of the People's Republic of China. While the world often calls it the 'Yuan', this is technically the name of the currency's basic unit, much like 'pound sterling' is the currency and 'pound' is the unit. Think of it this way: you have 10 yuan in your pocket, and the currency itself is the Renminbi, which translates to “the people's currency.” The Renminbi is unique because it's not fully convertible and exists in two distinct forms: the 'onshore renminbi (CNY)', which trades within mainland China, and the 'offshore renminbi (CNH)', which trades freely outside the mainland, primarily in Hong Kong. This dual system is a result of China's strict 'capital controls', designed to manage the flow of money into and out of the country. The currency's value is closely managed by the 'People's Bank of China (PBOC)', which sets a daily reference rate for the onshore CNY, allowing it to trade within a narrow band.

For an investor, understanding the difference between CNY and CNH is non-negotiable.

• CNY (Onshore Renminbi): This is the “domestic” version. Its 'exchange rate' is tightly controlled by the PBOC. Access to it is restricted, meaning you can't just wire your dollars to a Chinese bank and freely exchange them for CNY. Its price reflects the government's economic policy goals.
• CNH (Offshore Renminbi): This is the “international” version, designed for foreigners. It trades freely in global markets and its value is determined by supply and demand, just like the Euro or US Dollar. While the CNH rate tends to track the CNY rate closely, they can diverge, especially during times of market stress. This divergence provides a real-time gauge of international sentiment towards China's economy and its currency. For most foreign investors buying Chinese assets, the CNH is the currency they will deal with.

The Renminbi is no longer just a domestic currency. Beijing has been working for years to increase its international clout, aiming to challenge the US dollar's dominance as the world's primary 'reserve currency'. A major milestone was achieved in 2016 when the 'International Monetary Fund (IMF)' added the Renminbi to its 'Special Drawing Rights (SDR)' basket, an elite club of world currencies that also includes the US dollar, Euro, Japanese yen, and British pound. China is also actively promoting the RMB for settling international trade, particularly with its “Belt and Road” initiative partners. While it has a long way to go to unseat the dollar, its growing importance on the world stage is undeniable.

So, what does all this mean for a shrewd value investor? Currency is not just a medium of exchange; it's a critical component of your investment thesis when buying foreign assets.

When you buy a stock in a Chinese company, you're making two bets: one on the company's future success and one on the future of the Renminbi. Even if your stock pick doubles in value in Yuan terms, your actual return can be wiped out if the RMB weakens significantly against your home currency (e.g., USD or EUR). Conversely, a strengthening RMB can act as a powerful tailwind, boosting your returns without the company even lifting a finger. This currency risk is a fundamental layer of analysis in international 'value investing'.

For years, many economists and politicians, particularly in the US, argued that China was deliberately suppressing the value of its currency. This policy, sometimes achieved through a 'currency peg' or managed float, made Chinese goods artificially cheap on the world market, fueling its export-led growth. For a value investor, an artificially suppressed asset screams opportunity. If you believe the RMB is fundamentally undervalued and will inevitably be allowed to appreciate to its “fair value” over the long term, then buying RMB-denominated assets could come with a built-in 'margin of safety'. However, this is far from a sure thing. China's government could also guide the currency lower through 'devaluation' if it needs to stimulate a slowing economy. Your thesis on the currency must be just as robust as your thesis on the company you are buying.

Before investing in China, consider these points:

• Analyze Corporate Currency Exposure: Dig into the company's annual report. Does it earn revenue in US dollars but have most of its costs (like labor and supplies) in Renminbi? If so, a rising RMB could squeeze its profit margins. The opposite could be true for a company that primarily sells domestically but has to import raw materials.
• Form a Long-Term View: Don't try to time short-term currency swings. Instead, form a well-reasoned opinion on the long-term trajectory of China's economy and the Renminbi's role in it. Is the country's productivity growing? Is it becoming a more innovative, consumption-driven economy? These factors will ultimately influence the currency's strength far more than day-to-day noise.
• Consider Your “Circle of Competence”: As Warren Buffett advises, stay within your circle of competence. If you don't feel comfortable analyzing the complexities of a managed currency and China's political economy, you might be better off sticking to domestic investments or finding fund managers who specialize in this area.