Recently, people have been asking about cross-border payments, and it immediately brings up the concept of offshore RMB. Honestly, many people can’t tell the difference between CNY and CNH, and even don’t know why there are two separate systems in the first place. Today, I’ll explain this as clearly as possible.

First, let’s start with the most direct distinction. Onshore RMB is RMB traded within mainland China. It is under strict control by the central bank, and exchange-rate fluctuations are limited to a daily floating range of ±2%. The participants are mainly domestic banks, companies, and individuals. Its purpose is everyday economic settlement. Offshore RMB, however, is different. It is traded in places such as Hong Kong, London, and Singapore. The central bank does not directly intervene, and the exchange rate is determined entirely by international market supply and demand. Participants here are offshore banks, investment funds, and multinational corporations, and it is mainly used for cross-border investment and international trade settlement.

Simply put, onshore RMB is like the central bank’s “parental-style management,” while offshore RMB is the game international players play in a “free market.”

So why maintain two markets? Historically, China’s capital account wasn’t fully open. To isolate offshore risks while also pushing RMB internationalization, two markets were set up. Onshore CNY helps ensure domestic financial stability, while offshore CNH makes it easier for people outside the country to hold RMB and reduces the costs of cross-border transactions. For example, “the Belt and Road” projects often use CNH for settlement.

Interestingly, this model isn’t exclusive to China. India, Brazil, Malaysia, and South Korea have all implemented similar distinctions. Their offshore markets typically trade through non-deliverable forward markets. In essence, they’re all aimed at controlling capital flows and protecting the domestic economy from being hit by volatility in international markets.

For ordinary people, what does the existence of these two markets mean?

The most obvious is currency exchange. For individuals in mainland China, they can only exchange RMB up to the equivalent of $50,000 USD per year, and they also need to declare the purpose. But if you have a bank account in Hong Kong, using offshore RMB has no such restriction. Investment also differs: domestically, you buy A-shares and wealth management products with CNY; when you’re abroad, you use CNH to buy Hong Kong stocks or offshore RMB bonds.

Exchange-rate fluctuations are also a big deal. If import companies pay using CNH, they have to bear greater exchange-rate risk. But for arbitrageurs, the price gap between CNY and CNH is an opportunity to profit. When CNH depreciates, some people buy currency at a lower price.

Let’s give a real-world example. A Shanghai export company receives $1 million. If it converts domestically, it exchanges into RMB at the CNY exchange rate, which is under central-bank controls. But if it settles conversion through an offshore account in Hong Kong at the CNH exchange rate, it could make more or less money—because CNH is more volatile. When the Federal Reserve raises interest rates, CNH often depreciates quickly, because international capital sells RMB, while CNY depreciates by a relatively smaller amount due to central bank intervention.

Looking ahead, as RMB internationalization progresses—especially with the development of digital RMB for cross-border use—the exchange-rate gap between the two markets will gradually narrow. But in the short term, the CNH exchange rate is still more sensitive and more easily affected by international events, such as US-China frictions. As for CNY, it still focuses mainly on “maintaining stability,” and the central bank has plenty of tools in its toolkit.

To sum it up in one sentence: Onshore RMB is the “domestic version”—safe but constrained. Offshore RMB is the “international version”—free but volatile. The two are like two wheels of a car, jointly driving RMB toward the world. If you have cross-border transaction or investment needs, understanding the difference between these two is quite important.