How to take advantage of the CNY-CNH spread?


As China began to open up its economy, it wanted its currency to be used in the international markets to settle trades and financial transactions.  This was the catalyst for the The People’s Bank of China’s (PBoC) decision to create the offshore CNH market.

    CNY : Onshore Chinese currency only exchanged in mainland China

    CNH : Offshore Chinese currency only exchanged outside of China (Hong Kong, London, Singapore…)


CNY rate is controlled by the PBoC. The currency is non deliverable in the forward market and is convertible only within a Chinese current bank account.

CNH was launched in 2010 by the Hong Kong Monetary Authority (HKMA). The CNH FX rate is freely tradable and is driven by market forces. This leads to observed differences between CNY and CNH. Nevertheless, the two rates are highly correlated as Chinese monetary policy drives both CNY and CNH rates.

The crucial thing about the offshore Renminbi (CNH), is that it doesn't fluctuate within a tight band like the onshore Renminbi (CNY) and is free of Beijing's control in that regard.

 

1.   CNY-CNH spread : Market sentiment indicator

By looking at the spread between the offshore and onshore rates, traders can gauge the market’s sentiment towards the currency and its confidence in the PBOC’s policies. During the start of 2016 market volatility lead to a large divergence in the spread. It expanded to a record high of 2% on January 5th, 2016 signaling that investors were worried about Chinese economic data and anticipated the PBOC would continue to weaken its currency. 

Should a company have access to both offshore CNH and onshore CNY (via a local mainland Chinese bank account) then it can take commercial advantage of these spreads. 

 

2.   Taking commercial advantage of the CNY-CNH price disparity

  • If CNY > CNH

    1st Case : You need to buy Renminbi

  • You would be better off buying CNH (selling USD)

  • Then transfer your CNH to mainland China 


          Example : Market rate 11th of July, 2016 at 4:23pm

          USDCNY : 6.6884

          USDCNH : 6.7010


          We observe a spread of 18bps (126 pips) between CNY and CNH


    2nd Case : You need to sell Renminbi

  • You would be better off selling CNY as you will receive more USD than making the transaction in the offshore market

  • If CNY < CNH  

    1st Case : You need to buy Renminbi

  • You would be better off buying CNY

    2nd Case : You need to sell Renminbi

  • You would be better off selling CNH as you will receive more USD than making the transaction in the onshore market



3.   CNYCNH market price since March 2015

We can clearly see in the chart the difference between CNY and CNH (spread). If the spread becomes too large the HKMA and the PBoC can act hand in hand to reduce it through overnight CNH-HIBOR rates. 




4.   The two different markets are perfectly fungible

Even though the two currencies trade in separate markets they are perfectly interchangeable (fungible) as soon as a cross border payment occurs.


Source : Danske Bank Market Research


5.  Conclusion 

Assuming your FX and payments supplier has consistent markups between HK and China and you have banking facilities in both jurisdictions then there is an opportunity to take advantage of the differences in onshore and offshore pricing depending upon whether you are a buyer or seller.

In addition offshore CNH tends to trade at a discount to onshore CNY. Hence if you are generally a buyer of RMB and paying suppliers in China then buying RMB in the offshore market should be more cost-effective.