Offshore money (Offshore Money) refers to the currency for deposit business and transactions outside the issuing country. It should be noted here that the domestic cash currency circulating overseas is not an offshore currency. Correspondingly, traditional currencies that are not offshore are called Onshore Money. The operation of offshore currency is independent of the issuing country, so it is not subject to the laws, regulations and supervision of the currency issuing country, also known as "free currency".
Offshore currency transactions where both parties are non-local residents are called offshore financial services. All foreign currency transactions (or deposits and loans) are standard currencies, and non-residents are the transaction objects. The local banks and foreign banks form The banking system can be called an offshore financial center. The formation of offshore currency is not man-made, but various economic and political factors promote its formation. After World War II, financial institutions in various countries engaged in deposit and loan business in foreign currencies other than their own currencies. Foreign currency deposit and loan center. During the Cold War, Eastern European countries were unwilling to store US dollars in the United States because of the supervision of the US financial market. Therefore, the Eurodollar market was also the first offshore currency market, and the earliest offshore currency appeared in Europe.
This article will take RMB as an example to analyze the differences between offshore RMB (CNH) and onshore RMB (CNY) and the relationship between the two.
The difference between CNH and CNY
First of all, the onshore RMB is subject to more restrictions and influences from China’s laws, regulations and supervision. The main market participants include the central bank, domestic banks, financial companies of large state-owned enterprises, and domestic branches of foreign banks. The onshore RMB market has a long history of development and a large scale big. The onshore RMB exchange rate refers to the RMB spot exchange rate in mainland China, which is published by the China Foreign Exchange Trade System authorized by the People's Bank of China. Due to the mandatory foreign exchange settlement system implemented in the onshore market and the special role played by the central bank in the interbank foreign exchange market, the onshore RMB exchange rate cannot reflect market supply and demand, and the exchange rate management fluctuates.
In 2004, Hong Kong banks began to pilot personal RMB business outside mainland China, including deposit, remittance, exchange and credit card business, which was the beginning of the development of the offshore RMB market. In 2010, the offshore RMB market was initially formed. Offshore RMB has a shorter development time and smaller scale than onshore RMB, and is subject to fewer restrictions. The main market participants include import and export companies, offshore financial institutions, and hedge funds. Usually offshore RMB is more affected by the overseas economic and financial situation, and it also more fully reflects the market's supply and demand for RMB, and the exchange rate floats freely. The market outside mainland China where offshore RMB is located is the offshore RMB market, where RMB deposits and lending businesses can be operated. Currently, the main market for offshore RMB is in Hong Kong. There are currently three exchange rates in this market: spot exchange rate, forward deliverable contract (DF) and forward non-deliverable contract (NDF).
Because offshore renminbi is more closely connected with the international financial market, while onshore renminbi is subject to the control of the mainland market, and foreign exchange and renminbi cannot be freely imported and exported. Therefore, the impact of onshore renminbi on international factors is not that great. Sensitive, but the offshore RMB exchange rate will be affected by the impact of the international financial market, especially changes in the risk appetite of overseas investors. This is the main reason for the difference between the two sides. Therefore, when the international financial market is relatively turbulent, there will usually be a relatively obvious difference between the onshore RMB exchange rate and the offshore RMB exchange rate.
For example, if the renminbi appreciates for a long period of time, the offshore renminbi has become the focus of investors during this period of time. Because it can appreciate, everyone wants the renminbi, so the offshore renminbi exchange rate will Significantly higher than the onshore yuan during this period of appreciation. Conversely, if the renminbi is expected to depreciate, holders of offshore renminbi will want to exchange it for other currencies, and the exchange rate of offshore renminbi will also be affected and be lower than that of onshore renminbi.
Correlation between CNH and CNY
Although the offshore renminbi floats freely without the intervention of the People's Bank of China in theory, there is an inextricable relationship between the offshore renminbi and the onshore renminbi. CITIC Securities has previously done onshore renminbi and offshore renminbi. According to the analysis, the current onshore RMB and offshore RMB exchange rates mainly affect each other through three channels:
1. Trade settlement through cross-border import and export enterprises
When the offshore renminbi is weaker than the onshore renminbi, cross-border export companies will tend to trade in the offshore market, because the same dollar income can be exchanged for more renminbi income in the offshore market. Export companies sell dollars and buy renminbi in the offshore market, which in turn will make the offshore renminbi appreciate.
Cross-border import companies tend to trade in the onshore market, because the same amount of US dollar import expenditure can be purchased with less RMB in the onshore market. The behavior of importing companies to sell renminbi and buy dollars in the onshore market will depreciate the onshore renminbi. As a result of these transactions, the spread between the onshore and offshore yuan exchange rates will narrow. However, the government still has restrictions on such behaviors of cross-border import and export enterprises. If a cross-border trading company chooses to trade in the offshore market, that is, at the offshore exchange rate, the benefits of this transaction cannot be transferred back to the onshore market.
2. Through the non-deliverable forward foreign exchange (NDF) market
Onshore financial institutions are not allowed to trade in the offshore RMB market, and offshore financial institutions are not allowed to conduct any activities in the onshore RMB market, so they cannot directly conduct arbitrage transactions between the offshore and onshore RMB markets. However, they can all operate in the non-deliverable forward (NDF) market. The non-deliverable forward foreign exchange transaction is an offshore financial derivative product. Onshore financial institutions can conduct arbitrage through the onshore RMB forward market and NDF market, and offshore financial institutions can conduct arbitrage through the offshore RMB forward market and NDF market. Arbitrage. The arbitrage behavior of both will make the onshore and offshore RMB exchange rates converge.
3. Information or confidence channels will also lead to the convergence of exchange rates between the two places
An example of the channel of information and confidence is that offshore investors' confidence in the economic growth of the Mainland may also decline when the economic outlook of the surrounding countries deteriorates (since the surrounding countries are important export destinations for China). In this way, the offshore renminbi exchange rate may depreciate, which will affect the confidence of the onshore market in the renminbi, thereby driving the onshore renminbi exchange rate to change in the same direction.
Can ordinary investors carry out arbitrage between offshore RMB and onshore RMB?
We can regard the difference between the onshore RMB exchange rate and the offshore RMB exchange rate as an arbitrage space. Once this kind of space appears, there will be a steady stream of investors appearing to carry out arbitrage operations, but as mentioned earlier, the exchange rate price of offshore RMB will also be affected by this and the price difference will also increase. It will eventually be lower than the cost of going to the bank for exchange, so this space is basically useless for individuals and most of the time for individual investors, but some cross-border companies will take straddle arbitrage.
Good luck with the transaction!
Add
