Offshore RMB

Offshore RMB refers to renminbi (RMB), China's currency, that is deposited, traded, lent or invested outside Mainland China. The largest offshore center is Hong Kong, followed by markets such as Singapore, London and Taiwan. In the foreign exchange market, offshore renminbi is quoted under the unofficial code CNH, to distinguish it from the onshore currency quoted as CNY.

The offshore market gives foreign companies, banks and investors a place to hold and use renminbi under the laws of the offshore jurisdiction, with freely tradable balances. However, because China maintains capital controls, offshore RMB cannot be moved freely into Mainland accounts; transfers between the two pools pass through approved channels.

Banks in Hong Kong began offering personal renminbi deposits in 2004, with Bank of China (Hong Kong) acting as the designated clearing bank. The market expanded after a 2009 pilot allowed cross-border trade to be invoiced and settled in renminbi, and grew rapidly from July 2010, when revised arrangements allowed companies and financial institutions in Hong Kong to hold and transfer renminbi with few restrictions. Renminbi-denominated bonds issued in Hong Kong, nicknamed "dim sum" bonds, had appeared from 2007.

Over the following years the People's Bank of China (PBoC) appointed an RMB clearing bank in many other financial centers and signed central bank swap lines with dozens of countries. Channels such as Stock Connect, launched in 2014, and Bond Connect, launched in 2017, linked offshore investors with Mainland securities markets.

Offshore banks hold renminbi in accounts with a clearing bank or with Mainland correspondents, and the clearing bank in turn has access to Mainland settlement. Cross-border renminbi payments are increasingly processed through CIPS, China's cross-border interbank payment system. Within Hong Kong, renminbi payments settle through a local real-time gross settlement system.

The CNH exchange rate is set by supply and demand in the offshore market, without the daily trading band that applies onshore. Offshore interest rates, including CNH interbank rates, can move sharply when liquidity tightens. The Hong Kong Monetary Authority operates liquidity facilities to support the market.

Both CNH and CNY are the same currency, but they trade in separate pools with different rules and can trade at different prices. The gap between them, known as the CNY-CNH spread, usually stays small because arbitrage through permitted channels links the two markets, but it can widen during periods of stress or expectations of policy change. Onshore renminbi is described further under onshore RMB.

• Trade settlement. Exporters and importers trading with China can invoice and pay in renminbi, using cross-border RMB settlement, and hold balances offshore to pay Chinese suppliers.
• Hedging. Companies with renminbi exposure use CNH forwards, swaps and options, or create a natural hedge by matching renminbi receipts and payments.
• Investment and financing. Investors buy dim sum bonds and deposits; companies and governments borrow in renminbi offshore.
• Payments businesses. Remittance and cross-border payment firms use offshore accounts to collect or pay out renminbi without having a Mainland presence.

Holding offshore renminbi does not give unrestricted access to the Mainland financial system. Paying a Mainland beneficiary requires the payment to fit permitted categories, such as genuine trade in goods or services under current-account rules, and Mainland banks check supporting documents in line with rules set by the State Administration of Foreign Exchange (SAFE). Investments into the Mainland are similarly limited to approved channels. The renminbi is therefore only partly convertible, a status discussed under currency convertibility. The development of the e-CNY digital currency has not, to date, changed this basic division between onshore and offshore pools.