We frequently get questions about the difference between the onshore (CNY) and offshore (CNH) renminbi market.
Remember, the offshore renminbi came about as China began trying to internationalize its currency.
Here is the difference between the two.
As China began to open up its economy, it wanted its currency to be used in the international market to settle trade and financial transactions, without, however, fully opening up its capital account.
Hong Kong, which has served as an international hub for mainland China, naturally happened to be a great place for an offshore renminbi (CNH) market. Singapore, Taiwan, and London have since developed their own offshore renminbi markets.
It began with the development of personal renminbi banking business in 2004 when renminbi deposits were allowed in Hong Kong, according to Vanessa Rossi and William Jackson at Chatham House .
They go on to say, Bank of China (Hong Kong) was designated as the sole offshore renminbi clearing bank some time in 2004. Renminbi deposits continued to climb, especially once the bond market was established in 2007. Bonds issued in renminbi outside the mainland were dubbed dim sum bonds. In 2010, McDonald's became the first foreign (non-financial) company to issue a dim sum bond.
Renminbi deposits continued to pick up with the launch of the trade settlement scheme in 2009–2010.
thing about the offshore renminbi (referred to as CNH here on), 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.
In settling trade in renminbi, many companies accept CNY payments from Chinese importers and change that into dollars at the more attractive offshore rate. And borrowing costs are much cheaper in the CNH bond market than in mainland China. From the Financial Times:
"Fervent demand for renminbi from international investors has driven down rates in Hong Kong and thereby created incentives for companies considering using the renminbi for trade or financing.
Foreign exporters have cottoned on to the fact that the renminbi-dollar exchange rate is at a premium in Hong Kong compared with the mainland. To arbitrage the two markets, these companies accept renminbi as payment from Chinese importers, then swap the cash into dollars at the more attractive offshore exchange rate."
The expectation that the renminbi would appreciate has been a key factor driving demand for CNH.
But Chinese state media has warned that a sharp renminbi appreciation is unlikely in 2013. Moreover, the gap between the CNH and CNY has narrowed.
This is part of a broader feature on the renminbi that traced its evolution since the mid-'90s.
SEE ALSO: Everything You Need To Know About The Renminbi >