On Chinese Money

If you have ever dealt with Chinese money in the context of banking or trading, you have likely come across various terms such as RMB, CNY, CNH and CNO.

RMB (Renminbi) is an all-inclusive term for all money issued by the People's Bank of China (PBoC). Moving RMB outside of China is possible - but not easy. Therefore, depending on where this money is located, it may have different exchange rate against the USD and also different name. "Location" of money is important.

Part 1: CNY

CNY (onshore) refers to Renminbi held within mainland China. Internal and cross-border transactions involving CNY fall under the jurisdiction of the PBoC.

Foreign companies can hold onshore CNY only if they establish a subsidiary in China, receive payment for goods sold to Chinese customers or participate in certain investment programs.

PBoC enforces strict capital controls and sets a target exchange rate for onshore yuan, because of its effect on trade balance and economic relationships with other countries.

💱All FX transactions executed on the China Foreign Exchange Trade System (CFXS) are subject to market forces (shown as the red line), but cannot deviate more than 2% from the PBoC's policy rate (blue line).

📈The graph below shows that up to August 2023, the PBoC allowed the target rate to float with the market rate on CFXS - signaling no active intervention.

☝However, since August 2023, the PBoC began setting the target rate below the CFXS market average, indicating a "strengthening policy" for the yuan.

🗣️President Trump accused China of deliberately devaluing the yuan to make exports cheaper - specifically in August 2019 and again in April 2025. This claim may be broadly based on existence of capital controls, however is not supported by the below graph or interest rate data, which speaks opposite.

Technically speaking, no currency ever physically leaves the country where it's issued - and China is no exception. Foreign banks hold RMB in nostro accounts within mainland institutions. So, when we refer to "inside" or "outside" China, we're speaking in regulatory terms, not geographical ones.

Part 2: CNH

Before the introduction of CNH, the only way to move money in and out of China was to convert it into USD or another currency using the onshore China Foreign Exchange Trade System (CFXS), under PBoC supervision. Trading onshore yuan is subject to capital controls, and it is not possible to freely send CNY directly between foreign banks.

🌐 As part of the internationalisation effort, a "free version" of yuan was introduced in 2010. Crossing the onshore-offshore boundary is still subject to the same capital controls, but once the currency is border-cleared, it can be traded much like any other G10 currency.

The offshore version of yuan is called CNH, where "H" stands for Hong Kong - the first place where CNY was originally internationalised. Nowadays, banks in many other international centres accept CNH deposits.

1 CNY becomes 1 CNH once it crosses the onshore-offshore boundary. However, because crossing this boundary is not easy, yuan can have different values in different geographical locations. The graph below shows USD/CNY and USD/CNH rates.

The graph illustrates several points:

1️⃣ Overnight CNH-CNY premium fluctuations are very common. One day, CNH trades at a 1.3% discount to CNY; the next day, the situation reverses. This is because CNH is market-driven and reacts faster to international news, whereas CNY is managed by the PBoC and trades under supervision.

2️⃣ A 90-day rolling mean shows that the CNY/CNH premium tends to exhibit seasonality. We can conclude that, since 2023, onshore yuan tends to be, on average, more valuable than its offshore counterpart. This indicates that crossing the offshore-to-onshore boundary inward may be marginally more difficult than the other way around.

3️⃣ The green line represents the premium that 3-month CNH deposits in Hong Kong banks command over CNY deposits in Shanghai banks (i.e., HIBOR minus SHIBOR). As shown, CNH deposits generally offer higher interest rates.

Furthermore, CNH deposit premiums tend to be negatively correlated with CNH spot FX premiums. This relationship can be explained by interest rate parity, as both currencies are ultimately expected to converge to a one-to-one exchange rate.

4️⃣ Last but not least, I believe that arbitraging any sort of disparity between CNY and CNH is next to impossible. The observed behaviour is, to a large extent, a “real money” matter.

Part-3: Non-deliverables

CNY refers to Renminbi deposits held in mainland Chinese banks, while CNH represents similar deposits in Hong Kong and other offshore financial institutions. Although the nominal value of CNY and CNH is 1:1, capital controls can cause exchange rates to diverge across jurisdictions.

What do CNY and CNH have in common? Both represent real money that can be physically delivered into accounts and earn interest—SHIBOR in the case of Shanghai banks, and HIBOR for Hong Kong banks.

🌍The world of non-deliverables🌍

In today’s post, we’ll explore the non-deliverable yuan and its associated derivatives market. In some banks, this is denoted by the currency code CNO. CNO differs from both CNY and CNH. It cannot be delivered or deposited anywhere. There is no spot market for it, nor any interbank interest rate.

How non-deliverability work ?

In a non-deliverable forward (NDF), two parties - say, located in London -agree on a forward FX transaction for a specific amount to be settled on a future date. However, since neither party can access actual yuan, the contract is typically settled in USD, based on the difference between the agreed forward rate and the prevailing spot rate at settlement.

The attached chart (past 2 years) shows several important points:

1️⃣ Both CNY and CNH (🟦+🟥) show similar patterns when it comes to FX forward premiums. The premiums are typically negative, due to the fact that USD is generally a high-yielding currency. The graph also shows a small cross-currency basis, compared to what we would get under the HIBOR vs. SHIBOR interest rate differential.

2️⃣ SHIBOR and HIBOR rates are strong "real money" factors keeping FX forward premia in check. These interbank rates help anchor expectations and reduce volatility in deliverable forward markets. In contrast, the non-deliverable forward premia (CNO 🟩) lack such stabilizing influences, making them considerably more erratic

3️⃣ While deliverable CNY forwards (🟥) trade as spread to USD/CNY CFXS spots (as one would naturally expect), the non-deliverable forwards are settled against the PBoC’s policy FX rate instead (🟩).

☝This has broad implications for the non-deliverable market. By now, you should know the PBoC’s policy FX rate is not fully market-driven and can occasionally be influenced by policymakers’ discretion - an influence that also extends to non-deliverable forward payoffs.

🤔 Why is that the case? Is it a legacy of non-deliverable market? Or does this convention has a reason? One thing is certain: the market has it's own mind, as it shows a stronger correlation between outright NDF rates and the CFXS spot rate (92.8%), than with the PBoC fixing rate (81.8%).