How do businesses make use of exchange rate differences between CNY and CNH? | Article – HSBC VisionGo
For business owners dealing in cross-border trading, exchange rates and currency conversion rates are certainly among their top concerns. As the impact of a small volatility in exchange rate could mean heaven or hell for profit margins, it is simply impossible to underestimate the potential loss or gain from currency dealings. When exchanging for Renminbi (RMB) in Hong Kong and the mainland China respectively, Hong Kong business owners operating in the mainland China will notice that there are two different kinds of RMB for exchange – onshore Renminbi (CNY) and offshore Renminbi (CNH), with two separate sets of exchange rates.
So, what exactly are CNY and CNH? Which kind of RMB should Hong Kong businesses use in transactions with the mainland China? How can they make use of exchange rate differences between CNY and CNH to lower exchange costs? This article is going to provide answers to all these questions.
Use CNY in the Mainland, and CNH in Hong Kong
The terms “onshore” and “offshore” are used with reference to the Mainland China market, with “onshore” meaning inside the Mainland market, and “offshore” referring to markets outside the mainland China. Accordingly, CNY means Renminbi traded within the mainland China, while CNH refers to Renminbi traded outside the mainland China, such as CNH markets in Hong Kong, Singapore and London. Both CNY and CNH are Renminbi, and there is no need of conversion between the two, since they can move freely between Renminbi accounts. However, there may be a difference in value in their respective trades with other currencies.
With the Chinese capital market (including FX) yet to open fully, the Hong Kong offshore Renminbi (CNH) market is initiated to facilitate mainland businesses in their engagements with international trade and financial markets. The CNH rate is quoted based on trades from businesses and institutions in Hong Kong which are free to open Renminbi accounts and deal in the currency.
Although Hong Kong is currently the world’s biggest offshore Renminbi market, local banks can process only payment transactions in CNH but not CNY. Therefore, companies dealing in imports/exports often hold both mainland bank accounts and Hong Kong bank accounts to deal with CNY and CNH separately.
Longstanding gap between CNY/CNH exchange rates
First of all, let’s look at how exchange rates are determined for CNY and CNH respectively. The People’s Bank of China authorised the China Foreign Exchange Trade System to quote central parity rates every morning for CNY trades against major currencies such as USD. However, within the mainland China’s interbank spot forex market, CNY/USD trades will not go beyond 2% over or below the quoted rate. CNH, on the other hand, is freely traded, with pricing subject only to demand and supply.
This shows CNY is subject to more stringent regulation (in conversion with other currencies), while CNH is more closely connected with international financial markets, and hence takes impact from volatilities in those markets. This is where a difference in exchange rates would occur between CNY and CNH.
USD/CNY and USD/CNH trends since January 2020
For example, let’s look at USD/CNY and USD/CNH respectively. Given factors explained above, there is a longstanding gap between their exchange rates. However, this does not mean either CNY or CNH always strengthens against the other. Business owners should always check spot market rates when making instant decisions for currency conversion, in order to determine whether to go for CNY or CNH and benefit from the lower conversion cost.
How to minimise currency conversion costs using the difference between CNY and CNH exchange rates?
While trading or operating a business across borders often entails exchange risks, Hong Kong business owners can always make use of the exchange rate difference between CNY and CNH to lower their exchange costs, and gear up risk management.
Assuming you own an import/export business and need to process business and fund flows between USA and mainland China. The table below illustrates in detail how the appreciation or depreciation in RMB would impact on USD/CNY and USD/CNH rates respectively, and the suggested actions for businesses in order to keep down exchange costs.
Actions for exporters with production base in the mainland China and sales proceeds received in USD
Actions for importers with expenses settled in USD and sales income earned in the mainland China
When USD/CNH < USD/CNY, each US dollar can be exchanged for more CNY.
Sell USD and buy RMB at USD/CNY rate in the mainland market.
For example, the exporter should convert the USD10,000 sales proceeds for RMB66,000, rather than convert for RMB65,000 in Hong Kong with the same amount.
The RMB thus exchanged in the mainland China can be used directly to cover marketing/production expenses in the mainland.
Sell RMB and buy USD at USD/CNH rate in Hong Kong.
For example, where payments need to be settled in USD, remember in this scenario, RMB65,000 converts into USD10,000 in Hong Kong, whereas in the mainland China, you need RMB66,000 to buy the same amount of USD.
With the USD bought in Hong Kong, the importer can pay overseas suppliers in USD directly from its Hong Kong account.
When USD/CNY < USD/CNH, each US dollar can be exchanged for more CNH.
Sell USD and buy RMB at USD/CNH rate in Hong Kong.
As an illustration, convert USD10,000 of sales proceeds into RMB66,000 in Hong Kong, instead of exchanging for only RMB65,000 with USD10,000 in the mainland China.
The exporter can simply transfer the RMB funds from its Hong Kong account to its mainland account to cover marketing or production costs in the mainland China.
Sell RMB and buy USD at USD/CNY rate in the mainland China.
As an illustration, remember that for your USD payment needs, you can convert RMB65,000 into USD10,000 in the mainland China. But you need RMB66,000 to exchange for USD10,000 in Hong Kong.
After exchanging for USD in the mainland China, the importer can transfer those USD from its mainland account to its account in Hong Kong, where payments can then be remitted to overseas suppliers.
Before applying for bank accounts in the mainland China and moving money in and out of those accounts, please be sure to check that these accounts do support transactions in the foreign currencies you require, and whether any restrictions may apply to your accounts.
Are there any tools that provide real-time FX quotes for my FX needs?
Having understood the logic behind cost saving by leveraging the gap between CNY and CNH, you are now ready to swing into action with the help of tools that offer instant FX rate quotes. However, one must bear in mind Hong Kong banks provide only the CNH rate, while CNY rates must be obtained through mainland banks. You may wish to choose from the HSBC tools listed below for rate quotes and FX transactions.
1. The HSBC Business Express mobile app
Log in on the mobile app, and click “More” at the bottom right corner to set up “My Favourites”, “Rate Alerts” and “FX Order” under “FX Conversion”. All of these settings can be done on your mobile device or via online banking.
Rate Alerts: setting can be done simply by entering your target FX rate and date of expiry into the “Rate Alerts” column under the “FX Conversion” menu. Once FX rates move into range with your target price, you will receive notification instantly by email, SMS, WeChat message or push notification from the mobile app, according to your preference indicated in HSBC Business Express Online Banking Message Centre. You can then log in to your mobile app and perform FX or CNH conversions immediately to meet with your FX cashflow needs.
FX Order: when spot FX rates move to your target rate, the bank will automatically execute your FX Order to convert your CNH into the foreign currency you require.
|My Favourites: users can check real-time FX rates for up to 10 portfolios.||Rate Alerts: simply input your target FX rates and expiry date to complete the setting.||FX Order: when spot FX rates reach your target, the bank will automatically execute your FX Order.|
2. HSBC Evolve – the digital platform for FX transactions
HSBC Evolve, the Bank’s proprietary FX trading platform, comes in an overseas version (in English) and a mainland version. You can log in to your HSBC Hong Kong account or mainland account respectively, and access FX spot, forward, swaps or non-deliverable forward (NDF) rates of more than 1,500 currency pairs (including RMB). These information provide customers with flexible and highly competitive streaming quotes for comparison between CNH and CNY movements, facilitating decisions to trade instantly. What’s more, our dedicated e-FX professionals offer 24-hour support to support customers through online chat service.
HSBCnet provides a single platform from which customers could monitor all their global banking needs. This is a paid service especially tailored to the needs of users with various overseas bank accounts. For example, in FX services, HSBCnet offers rate preview for a number of currencies through the instant forex calculator. The service also enables customers to track payment status for transactions over the past 35 days.
With the help of the above functionalities and careful comparison between spot rates for CNY and CNH, business owners would be able to make timely decisions to convert sizeable amounts of CNY/CNH at a rate that minimise their costs.
Currency conversion risk - the value of your foreign currency and RMB deposit will be subject to the risk of exchange rate fluctuation. If you choose to convert your foreign currency and RMB deposit to other currencies at an exchange rate that is less favorable than the exchange rate in which you made your original conversion to that foreign currency and RMB, you may suffer loss in principal.