Recently, I talked with friends about cross-border payments and found that many people actually can't tell the difference between offshore RMB and onshore RMB. I only recently figured it out myself, so I might as well organize my thoughts.

Speaking of which, this matter starts with the openness of China's capital account. Because the central bank has strict control over the domestic financial markets, two systems have emerged—one used domestically, and one used offshore.

Onshore RMB is the CNY we usually use domestically. The RMB traded at the Shanghai Foreign Exchange Trading Center is this type, directly regulated by the central bank, with clear restrictions on exchange rate fluctuations, generally a maximum of 2% per day. Banks, enterprises, and individuals all conduct daily settlements in this market, such as paying wages, shopping, and import-export trade.

Offshore RMB is different; its code is CNH. This is RMB traded in places like Hong Kong, London, and Singapore. The central bank does not have direct control here, and the exchange rate is entirely determined by supply and demand in the international market. Participants include foreign banks, investment funds, multinational corporations—players who use offshore RMB for cross-border investments, international trade settlements, and financial derivatives trading.

Essentially: CNY is under the "parental management" of the central bank, while CNH is "free trading" in the international market.

Why are there two systems? Simply put, it's to promote RMB internationalization while also protecting domestic financial stability. The onshore market ensures the domestic economy doesn't get out of control, while the offshore market makes it easier for foreigners to hold and use RMB, reducing cross-border transaction costs. The Belt and Road projects often use CNH for settlement.

It's not just China that does this. India Rupees, Brazil Reais, Malaysia Ringgit, and South Korean Won all have similar distinctions. The offshore markets in these countries usually trade through non-deliverable forward markets. The purpose of this design is similar—control capital flows and prevent domestic economies from being impacted by international market volatility.

For ordinary people, the difference is felt during currency exchange. Domestically, you can only exchange up to $50k USD worth of RMB per year, and you need to declare the purpose. But if you have an offshore RMB account in Hong Kong, there are basically no such restrictions. Investment options differ too: onshore CNY can be used to buy A-shares and domestic financial products, while offshore RMB can be used to buy Hong Kong stocks or Dim Sum bonds.

Exchange rate fluctuations are also an issue. Importers paying with CNH face greater exchange rate risk. But arbitrageurs like this—they profit from the price difference between CNY and CNH.

Here's an example: a Shanghai export company receives $1 million. Converting it domestically at the CNY exchange rate, regulated by the central bank, won't fluctuate too much. But if they settle in Hong Kong with an offshore account, using the CNH rate, they might earn more or less because CNH is more sensitive to fluctuations. When the Fed raises interest rates, CNH often depreciates quickly because international capital sells off RMB. Meanwhile, CNY, with central bank intervention, depreciates much less.

Looking ahead, as RMB internationalization advances—especially with the increasing cross-border use of digital RMB—these two markets' exchange rate gaps will gradually narrow and eventually converge. However, during this process, CNH will be more sensitive and more easily impacted by international events, such as US-China tensions, which can cause it to fluctuate. CNY will still focus on "stability," with a broader toolkit of interventions.

In simple terms: CNY is the domestic version of RMB—safe but restricted; offshore RMB is the international version—free but volatile. The two markets are like the two wheels of a car, jointly driving RMB's journey toward global prominence.