As the world’s second-largest economy, China’s currency, the yuan, has become increasingly important in global trade and finance. However, many aspiring forex traders may be surprised to learn that they cannot trade yuan on the forex market. So why can’t you trade yuan in forex?
The main reason is that the Chinese government tightly controls the yuan’s exchange rate. Unlike other major currencies such as the US dollar, euro, and Japanese yen, the yuan is a tightly managed currency that is not freely traded on global currency markets. Instead, the People’s Bank of China (PBOC), the country’s central bank, sets a daily reference rate for the yuan against the US dollar, and then allows the currency to trade within a narrow band around this rate.
This currency management policy is designed to maintain stability in the yuan’s exchange rate and prevent excessive volatility in the Chinese economy. However, it also limits the ability of traders to speculate on the yuan’s movements and profit from currency fluctuations.
Another reason why you can’t trade yuan in forex is that the Chinese government imposes strict capital controls on the movement of money in and out of the country. This means that it can be difficult and time-consuming for traders to exchange yuan for other currencies and vice versa. In addition, the Chinese government limits the amount of yuan that can be converted into other currencies each year, which further restricts the flow of capital.
The combination of currency management and capital controls means that the yuan is not a freely convertible currency in the way that other major currencies are. This makes it difficult for forex traders to access the yuan and trade it on global currency markets.
However, there are some limited options for trading yuan outside of China. One option is to trade offshore yuan, also known as CNH, which is a version of the yuan that is traded outside of mainland China. Offshore yuan is not subject to the same capital controls as onshore yuan, which makes it easier to trade. However, the volume of offshore yuan trading is still relatively small compared to other major currencies, which means that liquidity can be limited.
Another option is to trade yuan-denominated currency pairs, such as USD/CNH or EUR/CNH. These currency pairs allow traders to speculate on the exchange rate between the US dollar or euro and offshore yuan. However, these currency pairs are still subject to the same currency management policies and capital controls as onshore yuan, which means that they can be volatile and difficult to trade.
In summary, the reason why you can’t trade yuan in forex is due to the Chinese government’s tight control over the currency’s exchange rate and its capital controls. While there are some limited options for trading yuan outside of China, the currency is not freely convertible in the way that other major currencies are, which makes it difficult for forex traders to access and trade. As China’s economy continues to grow and the yuan becomes more important in global trade and finance, it is possible that the currency will become more widely traded on global currency markets in the future. However, for now, traders looking to trade forex will need to focus on other major currencies.