Question

I am an absolute beginner to the job. Whenever I receive an inquiry from a client, my supervisor will text me a price in RMB (Chinese yuan) and ask me to divide it directly by 6.93. But I just checked the current exchange rate was around 6.35. What I am asking is, for the ratio 6.93 here, why is it different from the current exchange rate?​

Answer 1

Answer:

There had been a consensus among economists that the Chinese currency has been undervalued in the 15% to 40% range for many years.1 However, the International Monetary Fund (IMF) stated in the summer of 2015 that the Chinese currency was no longer undervalued against the dollar given its recent appreciation.2

Chinese money, however, comes by two names: the Yuan (CNY) and the people's renminbi (RMB). The distinction is subtle: while renminbi is the official currency of China where it acts as a medium of exchange, the yuan is the unit of account of the country's economic and financial system.

1:02

Yuan Vs RMB: Understanding The Difference

Money As a Medium of Exchange

Money enables anyone who possesses it to participate as an equal market player. When consumers use the money to purchase an item or service, they are effectively making a bid in response to an asking price. This interaction creates order and predictability in the marketplace. Producers know what to produce and how much to charge, while consumers can reliably plan their budgets around predictable and stable pricing models.

When money, as represented by a currency, is no longer viable as a medium of exchange, or if its monetary units can no longer be accurately valued. Consumers lose their ability to plan budgets, and there is no longer a way to gauge supply and demand accurately. In short, market volatility will cause the markets to become chaotic.

Prices are bid up or raised, in response to worries about scarcity and fears of the unknown. Meanwhile, supply diminishes because of hoarding behaviors, coupled with an inability of producers to quickly replenish inventory.

Money as Unit of Account

Unit of account (or numeraire) is an economic term that represents a unit in which prices are measured. A numeraire is usually applied to a single good, which becomes the base value for the entire index or market. By having a numeraire, or base value, it allows us to compare the value of goods against each other. In essence, the numeraire acts as a set standard of value across an exchange.

An example of a numeraire arises when we look at how currencies were valued under the Bretton Woods Agreement and System during the mid-twentieth century. The U.S. dollar (USD) was fixed at $35 per ounce of gold. All other currencies were then priced as either a multiple or a fraction of the dollar.3 In this situation, the USD acted as the de facto benchmark, or numeraire, because it was fixed to the price of gold.