CNY-CNH Spread

The CNY-CNH spread is the difference between the exchange rate of the onshore renminbi (CNY), traded within mainland China, and that of the offshore renminbi (CNH), traded outside the mainland, chiefly in Hong Kong. It is usually quoted as USD/CNH minus USD/CNY, in pips (units of 0.0001). A positive figure means the offshore currency is weaker than the onshore one.

Both rates refer to the same currency, the renminbi, but the two markets are separated by China's capital controls. Money cannot move freely between them, so the rates can diverge, and the size and direction of the gap is closely watched as a gauge of market pressure on the currency.

The onshore market is managed. Each trading day the People's Bank of China (PBoC) publishes a central parity, or fixing, for USD/CNY through the China Foreign Exchange Trade System, and the onshore spot rate may trade only within a band around it, set at 2% either side since 2014. Access to the onshore market is restricted to domestic participants and approved foreign institutions, and conversions are governed by rules of the State Administration of Foreign Exchange (SAFE).

The offshore market developed from 2010, as China allowed renminbi to accumulate in Hong Kong through cross-border RMB settlement of trade. CNH trades freely without a band, among banks, corporations and investors worldwide, with liquidity supported by designated RMB clearing banks and, since 2015, by CIPS. The CNH market is therefore more responsive to global sentiment.

• Expectations — when markets expect depreciation, offshore investors sell CNH first, pushing it weaker than CNY; expectations of appreciation work the other way.
• Liquidity — the pool of offshore renminbi is much smaller than the onshore pool, so changes in offshore funding move CNH rates more sharply. The cost of borrowing CNH, reflected in CNH HIBOR and the cross-currency basis, affects the forward and spot rates.
• Policy and intervention — the PBoC can influence both markets, onshore through the fixing and state bank activity, and offshore by tightening CNH liquidity or issuing central bank bills in Hong Kong.
• Channels between markets — trade settlement, investment schemes and bond market links let some money cross the border. The more open these channels, the more arbitrage narrows the gap.

Suppose the spot rate is 7.1000 for USD/CNY and 7.1250 for USD/CNH. The spread is 0.0250, or 250 pips, with CNH weaker. A company in Hong Kong buying US$1 million with offshore renminbi would pay CNH 7,125,000, whereas the same purchase onshore would cost CNY 7,100,000. A firm that can legitimately settle a trade payment in either market has a reason to choose the cheaper one; this incentive, operating through permitted channels, is what tends to pull the two rates back together.

The spread is normally small, often within a few hundred pips. It widened sharply in August 2015, when the PBoC changed the fixing mechanism and the renminbi fell, and offshore selling pushed CNH well below CNY. In January 2016 the authorities drained offshore liquidity to deter speculation, and overnight CNH interbank rates in Hong Kong spiked to extreme levels, squeezing short positions and briefly reversing the spread. Similar, smaller divergences have accompanied later periods of depreciation pressure.

For practitioners, the CNY-CNH spread affects the cost of converting renminbi for trade and remittances depending on which market a payment provider uses, and must be considered when comparing quotes or a mid-market rate. Traders, investors and policymakers also read it as a signal: a persistently weak CNH points to capital outflow pressure, while a convergence suggests calm or effective intervention. The spread illustrates how a single currency pair can carry two prices when currency convertibility is incomplete.