China’s market turmoil since the start of the new year has put the spotlight on a not-much-noticed quirk of trading the mainland’s currency: the offshore yuan doesn’t always want to stay in tune with its onshore peer.
What’s the difference between the onshore and the offshore yuan?
While China has slowly been opening its markets, the country still doesn’t allow a completely free flow of capital across its borders. The onshore yuan, also called the renminbi, is constrained by a trading band: China’s central bank, the People’s Bank of China (PBOC), lets the yuan spot rate rise or fall a maximum of 2 percent against the dollar, relative to the official fixing rate, which is set daily.
But the offshore yuan, abbreviated as the CNH, trades freely, based on market forces.
The offshore market was created in 2010 to help “internationalize” the currency for purposes such as hedging and investment, but not trade. Trade settlement can be done through a designated clearing bank in Hong Kong.