Understanding CNY and CNH: onshore vs offshore renminbi

The renminbi (RMB), China's currency, trades in two distinct markets with two different exchange rates. Onshore RMB, known as CNY, trades within mainland China under the supervision of the People's Bank of China (PBOC). Offshore RMB, known as CNH, trades outside mainland China — primarily in Hong Kong, but also in Singapore, London, and other financial centers. While both represent the same currency, they trade at different rates with different market dynamics.

This dual structure is a direct consequence of China's capital controls. The government wants the RMB to be usable internationally — for trade settlement, investment, and eventually as a reserve currency — while maintaining control over the domestic financial system. The offshore CNH market provides a sandbox for internationalization without fully opening the capital account.

For investors, understanding the CNY-CNH distinction is essential. Depending on which market you access, you may get a different exchange rate, different liquidity, and different regulatory treatment. This guide explains the mechanics of the dual currency system, what drives the spread between CNY and CNH, and how investors should think about currency exposure.

CNY is the renminbi traded within mainland China. It is subject to the PBOC's daily fixing (the central parity rate), which is set each morning and published by the China Foreign Exchange Trade System (CFETS). The spot rate is allowed to trade within a band around the fixing — historically ±2%, though the band has evolved over time.

The onshore market is dominated by domestic participants: Chinese companies needing foreign currency for imports, exporters converting foreign earnings to RMB, banks serving domestic clients, and the PBOC itself intervening to manage the exchange rate. Foreign participation is limited to approved channels: QFII/RQFII investors, Stock Connect and Bond Connect participants, and certain other programs.

Capital controls are the defining feature of the CNY market. RMB cannot freely leave mainland China, and foreign currency cannot freely enter. Each conversion requires a legitimate purpose: trade in goods, approved investment programs, personal travel or education within quotas. This segmentation from global markets is what allows China to maintain an independent monetary policy while managing the exchange rate.

For most foreign investors, you do not access the CNY market directly. When you buy A-shares through Stock Connect, your broker converts your currency to CNH offshore, and the Stock Connect mechanism settles with the mainland in CNY. The conversion happens through the system; you see only the net result in your account.

CNH is the renminbi traded outside mainland China. The "H" originally referred to Hong Kong, where the offshore market was first established in 2004. Since then, CNH trading has expanded to Singapore, London, Taipei, and other financial centers, but Hong Kong remains the largest and most liquid offshore RMB hub.

According to the Bank for International Settlements (BIS) 2025 Triennial Survey, Hong Kong retained its position as the largest offshore renminbi foreign exchange center. The average daily turnover of renminbi foreign exchange transactions in Hong Kong showed significant growth from 2022 to 2025, reflecting the currency's increasing internationalization.

Unlike CNY, CNH is freely convertible. It can be bought, sold, and transferred without capital control restrictions. The exchange rate floats more freely than CNY, determined by supply and demand in offshore markets. While PBOC intervention can influence CNH through state bank activity in Hong Kong, the rate is fundamentally market-determined.

CNH is the currency that foreign investors actually hold. When you open an RMB account with a Hong Kong bank, you hold CNH. When you receive dividends from a Chinese company listed in Hong Kong, they are paid in CNH. When international trade is settled in RMB, it is typically CNH. The offshore market is China's interface with the global financial system.

Because CNY and CNH trade in segmented markets, their exchange rates can differ. The spread between them — the CNY-CNH gap — fluctuates based on supply and demand imbalances, capital flow expectations, and market sentiment. Typically the spread is small, but it can widen significantly during periods of stress.

When CNH is weaker than CNY (more RMB per dollar offshore than onshore), it signals capital outflow pressure. Investors holding CNH are selling for dollars, pushing the offshore rate down relative to onshore. This has been the typical pattern during periods of RMB depreciation expectations, such as 2015-2016 after the surprise devaluation, and during various periods of dollar strength.

When CNH is stronger than CNY, it signals capital inflow expectations or strong demand for RMB assets offshore. This has occurred during periods of RMB appreciation or when international investors are building RMB positions. The spread direction provides a real-time indicator of market sentiment toward the currency.

Historical spread levels: In normal times, the spread is typically 0.1-0.5% (10-50 pips on the USD/RMB rate). During periods of stress, it has widened to 1-2% or more. In extreme cases, such as the 2015 devaluation shock, the spread exceeded 2%. A wide spread signals that onshore and offshore markets are pricing different expectations.

What prevents arbitrage? Capital controls. In theory, an investor could buy RMB where it is cheaper and sell where it is more expensive. But moving money between onshore and offshore markets requires regulatory approval or access to approved channels. The segmentation that creates the spread also prevents it from being easily arbitraged away.

The dual currency system affects investors in several ways, depending on the type of investment and the channel used.

Stock Connect and A-shares: When you trade A-shares through Stock Connect, the system handles currency conversion automatically. Your broker holds your funds in your base currency (USD, HKD, etc.), and when you place a trade, the conversion happens at prevailing rates. You are not directly exposed to the CNY-CNH spread; the clearing system nets and settles efficiently. For most retail investors, the spread is not a material consideration.

Hong Kong-listed stocks and ETFs: These trade in Hong Kong dollars, but dividends from Chinese companies may be paid in RMB. If you receive CNH dividends, your broker may convert to HKD or your base currency, or you may be able to hold CNH. The conversion rate affects your effective dividend yield.

Direct RMB holdings: If you open an offshore RMB account and hold CNH directly, you are exposed to the CNH exchange rate. Your returns depend on both the RMB assets you hold and the CNH/USD or CNH/base-currency rate. The CNY-CNH spread affects you indirectly — a wide CNH discount means your RMB is worth less in dollars than the onshore rate suggests.

RMB-denominated bonds: Dim sum bonds (CNH bonds issued offshore) pay interest and principal in CNH. Your return has two components: the yield on the bond and the currency movement. If CNH depreciates against your base currency, your return is reduced. The CNY-CNH spread affects bond pricing because issuers and investors consider both rates.

The People's Bank of China does not leave the CNY-CNH relationship entirely to market forces. It actively manages both markets to prevent excessive divergence while allowing some flexibility.

In the CNY market, the PBOC sets the daily fixing rate and intervenes through state-owned banks to keep trading within the allowed band. Intervention can be through spot market buying or selling, or through adjusting the RMB liquidity available to banks. The goal is to prevent excessive volatility while allowing the currency to adjust to market pressures gradually.

In the CNH market, the PBOC has fewer direct tools but can still influence rates. State-owned banks operating in Hong Kong can buy or sell CNH on PBOC's behalf. The PBOC can also adjust the supply of CNH by changing the RMB clearing quota for Hong Kong banks. Occasional issuance of offshore RMB bills by the PBOC's Hong Kong subsidiary drains CNH liquidity when needed.

The official position is that the government aims for a unified exchange rate over time. But full convertibility — where CNY and CNH would converge into a single market — remains a distant goal. The current dual system serves the purpose of allowing internationalization while maintaining capital controls.

The offshore RMB market originated to facilitate cross-border trade settlement. Chinese companies can pay their foreign suppliers in RMB, and foreign companies can receive RMB for goods sold to China. This reduces foreign exchange risk for Chinese importers and promotes RMB internationalization.

According to the People's Bank of China's 2024 report on RMB internationalization, cross-border RMB payments and receipts expanded 21.1% year-on-year to RMB 41.6 trillion in the first eight months of 2024. RMB use in goods trade settlement accounted for 26.5% of total trade settlement by value, up from 24.8% in 2023. The currency is gradually becoming more prominent in international trade.

For a foreign company receiving RMB payments from China, the process is straightforward: your bank receives CNH into your account, and you can convert to your local currency or hold RMB. No special approvals are needed for trade-related RMB receipts. This makes RMB settlement practical for companies with significant China business.

The growth of RMB trade settlement supports the offshore market's depth. As more companies accept and use RMB internationally, the CNH market becomes more liquid and more functional. This is the intended path toward eventual RMB internationalization.

China has been promoting RMB internationalization for over a decade. The offshore CNH market, RMB trade settlement, inclusion in the IMF's Special Drawing Rights (SDR) basket in 2016, and gradual expansion of foreign access to domestic markets are all part of this strategy. Progress has been steady but slow.

As a reserve currency, the RMB remains far behind the dollar and euro. According to IMF COFER data, RMB's share of global foreign exchange reserves is around 2-3%, compared to nearly 60% for the USD and 20% for the EUR. The yuan is the fifth most held reserve currency, after USD, EUR, JPY, and GBP.

In international payments, RMB has gained ground. SWIFT data periodically shows RMB among the top currencies used for international payments, sometimes reaching 4-5% of global payment volume. However, this is still a fraction of dollar dominance, and much of RMB payment volume is concentrated in Hong Kong and China-related trade.

The limiting factor remains capital controls. Reserve currency status requires that foreign central banks and investors can freely buy, hold, and sell the currency in size. CNY cannot be freely accessed from offshore; CNH can be accessed but has limited depth compared to major currencies. Full internationalization would require capital account convertibility, which China has not achieved and treats as a long-term goal without a specific timeline.

Most foreign investors do not need to actively manage CNY-CNH dynamics. But understanding the system helps interpret market signals and make informed decisions.

For Stock Connect investors: The spread is not a practical concern. Your broker and the clearing system handle currency efficiently. Focus on your investment thesis rather than currency microstructure.

For Hong Kong account holders: If you hold CNH directly, be aware that your exchange rate may differ slightly from the onshore rate quoted in mainland China. For small balances, the difference is immaterial. For larger positions, consider whether hedging or timing conversions makes sense.

For interpreting market signals: A widening CNH discount (CNH weaker than CNY) signals capital outflow pressure and bearish sentiment on RMB. A CNH premium signals inflow expectations. These are not trading signals per se, but they provide context for understanding market conditions.

For companies with China trade: Accepting RMB payment can be practical if you have RMB expenses or want to build an RMB position. If you need dollars, the conversion is straightforward in the CNH market. Discuss with your bank to understand the mechanics and costs.

For long-term currency views: The RMB's trajectory depends on China's economic fundamentals, US-China interest rate differentials, capital flow dynamics, and PBOC policy. The dual market structure adds complexity but does not change the fundamental drivers. Approach RMB exposure with the same rigor you would apply to any currency position.

CNY and CNH are the same currency trading in different markets: CNY onshore in mainland China, CNH offshore primarily in Hong Kong.

Capital controls segment the markets and prevent arbitrage, allowing CNY and CNH to trade at different rates.

The CNY-CNH spread signals market sentiment: a CNH discount indicates capital outflow pressure; a CNH premium indicates inflow expectations.

For most retail investors using Stock Connect or ETFs, the spread is not a material concern — the system handles conversion efficiently.

Direct holders of CNH should be aware their rate differs from onshore CNY, though typically by a small margin in normal times.

RMB internationalization is progressing but remains limited by capital controls. Full convertibility is a long-term goal without a timeline.

Hong Kong remains the largest offshore RMB center, with deep CNH liquidity and infrastructure for RMB settlement and investment.

Official sources:

- People's Bank of China (PBOC): www.pbc.gov.cn — RMB policy and exchange rate management

- State Administration of Foreign Exchange (SAFE): www.safe.gov.cn — Foreign exchange regulations

- Hong Kong Monetary Authority (HKMA): www.hkma.gov.hk — Offshore RMB market oversight

- China Foreign Exchange Trade System (CFETS): www.chinamoney.com.cn — CNY fixing rates and market data

Key data sources:

- Bank for International Settlements (BIS): Triennial Central Bank Survey — RMB turnover data

- IMF COFER: RMB reserve currency statistics

- SWIFT RMB Tracker: International payment statistics

- PBOC RMB Internationalization Report: Annual progress report

Research and analysis:

- HKMA Research Reports: Offshore RMB market analysis

- HSBC RMB Internationalization Study

- Standard Chartered RMB Roadmap