One Currency, Two Forward Prices: The Onshore-Offshore Renminbi Puzzle

2026-05-24

AI Summary

This study addresses the persistent and significant forward exchange rate divergence between onshore (CNY) and offshore (CNH) renminbi despite their close spot rate alignment under China’s partially convertible currency regime. The authors propose a novel joint spot-forward equilibrium model that incorporates market segmentation and transaction costs, innovatively introducing stochastic jump-driven offshore liquidity stress—manifested as abrupt shifts in transaction costs. This framework successfully replicates both the sign and magnitude of the empirically observed forward premium while preserving spot rate parity. Through an equilibrium asset pricing approach, semi-explicit analytical solutions, and empirical calibration, the model overcomes the limitations of conventional constant-cost assumptions and quantitatively identifies the market-implied probability and intensity of offshore liquidity shocks, thereby uncovering the economic origins and dynamic mechanisms underlying the CNY/CNH forward rate differential.

Abstract

Partially convertible economies face a market-design problem: trade integration, cross-border investment, and domestic balance-sheet exposure increase the demand for currency hedging before full financial integration is complete. China adopted a distinctive architecture for this problem by fostering a deliverable offshore Renminbi market (CNH) alongside the segmented onshore market (CNY), rather than relying only on non-deliverable forwards. This creates two venues for closely related claims on the same currency. Spot prices are tightly linked, yet CNY and CNH forwards display a persistent and economically large discrepancy. We study that discrepancy in a joint equilibrium model for spot and forward trading with transaction costs and segmented supply. In the benchmark case with common constant supply and deterministic costs, spot parity implies a forward differential with the wrong sign relative to the data. Random offshore stress, modeled as a jump in trading costs, overturns this benchmark while preserving tight spot parity. The model yields a semi-explicit representation in the CNY/CNH application and a calibration of the observed forward discrepancy in terms of the market-implied likelihood and severity of offshore liquidity stress.

Problem

• onshore-offshore renminbi
• forward price discrepancy
• currency hedging
• market segmentation
• liquidity stress

Innovation

• onshore-offshore RMB puzzle
• forward exchange rate discrepancy
• market segmentation
• liquidity stress
• equilibrium model with transaction costs