Understanding CNY and CNH: A Trader's Guide to China's Dual Currency System

What Sets CNY and CNH Apart?

The Chinese Yuan exists in two distinct forms in global financial markets. The CNY is the onshore version, traded within Mainland China’s regulated markets, while CNH represents the offshore Chinese Yuan, available in financial centers like Hong Kong, Singapore, London, and Luxembourg. This separation stems from China’s capital controls—the country’s foreign exchange market remains partially restricted, creating two separate trading environments with different characteristics and price points.

The Evolution of China’s Exchange Rate System

China’s currency system underwent a dramatic transformation beginning in 1994. Before that year, the onshore market operated under a dual-track regime with both an official rate and a market rate, creating significant disparities. The official USD/CNY stood at 5.8 at the end of 1993, while the market rate reached 8.7—a substantial gap. On January 1, 1994, these rates were unified into a single CNY exchange rate, marking the foundation of China’s modern foreign exchange framework.

Between 2005 and mid-2008, the People’s Bank of China (PBOC) introduced a managed-floating exchange rate system, allowing the Yuan greater flexibility. The USD/CNY strengthened by 2.1% as the currency shifted from a fixed USD peg to a basket-based reference model. However, when the global financial crisis erupted in 2008, China’s central bank temporarily re-pegged the Yuan to the USD to stabilize international trade, restricting USD/CNY movements between 6.81 and 6.85.

Since 2010, the CNY reform has accelerated. The daily trading band expanded from 0.5% in April 2012 to 1%, then doubled to 2% by March 2014. On August 11, 2015, China’s Central Bank weakened the daily CNY fixing by -1.82% to 6.2298, signaling another reform phase. Later that year, the PBOC introduced the CFETS Yuan Index as an official reference benchmark. Today, the managed-floating system remains operational in the onshore market.

CNH: The Offshore Yuan’s Shorter History

The CNH market began much later than its onshore counterpart. The letter “H” originally denoted Hong Kong, where offshore Yuan trading initiated. From 2004 to 2010, Hong Kong prepared for Yuan business by facilitating trade settlements in the currency. The actual offshore market launch came on August 23, 2010, when the PBOC and Hong Kong Monetary Authority formalized their clearing agreement, enabling USD/CNH quotations to begin trading officially.

Trading Implications: Why Traders Should Care

For active traders, understanding these distinctions is crucial. The offshore CNH market operates with less regulatory oversight than the onshore CNY market, making it more market-driven and suitable for speculative positions. This results in greater price volatility for CNH compared to CNY during market events.

During the 2018 US-China trade war period, both pairs rose from 15-month lows, but with notable differences. USD/CNH advanced from 6.2358 to 6.9587, while USD/CNY increased from 6.2419 to 6.9347. The offshore pair demonstrated sharper moves, reflecting its lesser regulatory constraints.

The CNH/CNY Spread: Reading Policy Signals

Historically, CNH trades slightly weaker than CNY. When this spread widens significantly, it typically signals Yuan weakness or speculative selling pressure. The PBOC uses the daily reference rate and other monetary tools to manage the onshore CNY first, with effects trickling into offshore CNH markets over time. Wide spreads often indicate conflicting market forces between China’s policy objectives and offshore traders’ sentiment.

As of today, USD/CNY remains the most actively traded Yuan pair with the highest volume, though China’s central bank increasingly monitors multiple CNY cross-pairs when setting policy direction. Understanding both the onshore CNY and offshore CNH dynamics provides traders with a more complete picture of China’s currency positioning in global markets.