Open a currency screen and look up the Chinese yuan, and you will find two prices that are almost – but not quite – the same. One is labelled CNY, the other CNH. They are the same currency, issued by the same central bank, and yet they trade in different markets under different rules. That split is the best way into a bigger story: how the renminbi is used in global trade, why China keeps tight control over it, and what that means for anyone doing business with Chinese companies.
Yuan or renminbi? Getting the names right
Renminbi ("the people's currency") is the official name of China's currency. Yuan is the unit, in the same way "sterling" is the currency and "pound" the unit. In practice both words are used interchangeably. The ISO code is CNY. CNH is a market convention, not an official ISO code, used to describe yuan traded offshore, originally centred on Hong Kong.
Onshore CNY: a managed exchange rate
The onshore yuan trades on the mainland's interbank foreign exchange market, and it is not a freely floating currency. Each trading morning the People's Bank of China (PBOC) publishes a central parity rate, often called the "fixing", against the US dollar. The onshore spot rate is allowed to trade within a band of 2% either side of that fixing.
Two other features define the onshore market:
- Capital controls. Moving money in and out of mainland China is restricted. Trade-related flows are generally allowed; many financial flows require approval, quotas or specific channels.
- Signals through the fixing. Market participants watch the fixing closely. When it is set noticeably stronger or weaker than models predict, it is read as a policy signal about where the authorities want the currency to go.
China moved away from a hard peg to the dollar in 2005 and has since managed the yuan against a basket of currencies, with periodic reforms. One notable change came in August 2015, when the fixing mechanism was adjusted to take more account of the previous day's close – a move that triggered a sharp, unexpected depreciation and global market jitters.
Offshore CNH: the yuan outside the wall
The offshore yuan market developed from around 2010 as China allowed renminbi to be held and traded outside the mainland, first and most heavily in Hong Kong, later in other centres such as Singapore and London.
CNH differs from CNY in important ways:
- No trading band. CNH is not formally bound to the fixing band; it trades freely according to offshore supply and demand.
- Wider access. International banks, companies and investors can trade it without mainland restrictions.
- Separate liquidity pool. Because capital controls separate the two markets, CNH and CNY can drift apart. Usually the gap is small; during stress it can widen.
Why CNY and CNH prices differ
The spread between CNH and CNY is a live gauge of sentiment. When offshore investors expect depreciation, CNH tends to trade weaker than CNY. When they expect strength, the opposite. Arbitrage keeps them close – companies with legitimate trade flows can sometimes choose where to convert – but capital controls stop the gap from closing completely.
The PBOC also has tools that affect the offshore market, including influencing offshore yuan liquidity. When the cost of borrowing CNH in Hong Kong spikes, it becomes expensive to bet against the currency, and authorities have at times been reported to use that channel to discourage speculation.
| Onshore CNY | Offshore CNH | |
|---|---|---|
| Where it trades | Mainland interbank market | Hong Kong, Singapore, London and others |
| Trading band | ±2% around daily fixing | No formal band |
| Access | Restricted, subject to capital controls | Open to international participants |
| Typical users | Mainland banks and corporates | Global investors, multinationals, Stock Connect users |
| Price signal | Policy-influenced | Market expectations |
The renminbi in global trade
China is one of the world's largest trading nations, so it is natural to ask why the yuan is not as widely used as the dollar or euro. The answer comes down to convertibility and trust in free movement of capital. Settling trade in a currency is easiest when the recipient can freely invest, hedge or move the proceeds.
Beijing has nevertheless worked steadily to expand the yuan's international role:
- Trade settlement in renminbi has been permitted and encouraged since the late 2000s.
- Central bank swap lines with many countries give foreign central banks access to yuan liquidity.
- SDR inclusion. In 2016 the IMF added the renminbi to the basket of currencies that make up its Special Drawing Right, alongside the dollar, euro, yen and pound.
- CIPS, a cross-border interbank payment system launched in 2015, processes renminbi payments.
- Market access schemes such as Stock Connect and Bond Connect create demand for yuan from foreign investors.
- Commodity contracts priced in yuan, including crude oil futures on the Shanghai International Energy Exchange.
Usage has grown, particularly for trade with China itself and among some of its key trading partners. But the dollar remains dominant in global payments, reserves and debt, and the yuan's share of global reserves remains small relative to China's economic weight. Full convertibility would change that equation, but it would also mean giving up control of capital flows – a trade-off Chinese policymakers have been reluctant to make.
What this means for businesses and investors
- Know which rate you are quoted. A supplier invoicing in yuan may convert onshore; your bank may hedge offshore. The difference is usually small but not always.
- Watch the fixing. It is the clearest daily signal of policy intent for the onshore rate.
- Hedge with CNH instruments if you are outside the mainland – forwards and options are most liquid offshore.
- Expect policy-driven moves. Managed currencies can be stable for long periods, then reprice abruptly.
- Account for currency risk in Chinese assets. Returns on A-shares or Chinese bonds for a foreign investor are partly a yuan trade.
The CNY vs CNH split is a compromise: China wants its currency used around the world while keeping control of money flowing across its borders. Understanding that compromise explains both the yuan's growing role in global trade and the limits on how far it can go without bigger reforms.
This article is for education only and is not financial or investment advice.
