China's socialist market economy is the world's second largest by nominal gross domestic product and purchasing power parity, beaten on both measures only by the US.
As a result, it is no surprise traders are taking a keen interest in the country's currency, the renminbi (RMB). The unit of account is called the yuan, but the RMB is the currency traded onshore and offshore, though there is a separation between these two markets.
This is because the leadership in Beijing impose capital controls in order to prevent money flowing abroad or vice versa. Therefore, when the RMB is traded within mainland China, it is referred to as CNY, while offshore trades - primarily in Hong Kong - use the USD/CNH pairing.
It is important investors are aware that while the renminbi is a single currency, it can trade at two different exchange rates, dependent on where the market is situated.
The CNH was formed as part of China's attempts to increase the significance of its currency in global markets. While volumes of USD/CNH trading remain relatively small and the pairing is generally highly liquid, it is becoming more popular as Beijing scales back restrictions.
For example, reforms in 2010 made it possible for the RMB to leave mainland China and head to Hong Kong for trading purposes. Following this move, foreign investors now have unrestricted access to the currency through cash accounts, forex trading, bonds, equities and through cross-border trade via Hong Kong.
Understandably, data releases relating to China's economic development have a significant impact on the USD/CNH pairing and should be monitored closely by those looking to trade the currency.
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