I was wondering what are the reasons why investors use USDCNH forwards vs NDF on USDCNY? Do you usually pick CNH for trade reasons, while CNY more for speculation as these are USD settled?
The offshore renminbi market is mainly in Hong Kong. The most important offshore renminbi market is a spontaneous market spawned by long-term trade between the two sides. Enterprises' import and export trade activities with Hong Kong and through Hong Kong as an intermediary will naturally produce currency transactions. This currency transaction can be settled in foreign currencies such as U.S. dollars. Of course, it can also be settled in RMB. The settled RMB stays in Hong Kong and gradually developed into the largest offshore RMB market. In addition, there are activities related to RMB such as direct investment, personal travel remittances, and dim sum bond issuance in recent years, but the main amount is still RMB brought by corporate trade.
The nature of this market and the RMB exchange rate system determine the behavior of this market. The renminbi has been expected to appreciate strongly for a long period of time, coupled with the control of the entry and exit of foreign capital, the offshore renminbi market in Hong Kong has become particularly interesting, and arbitrage against the renminbi is carried out in this market. If the initial function of this offshore market is to exchange trade funds, then as the expectation of RMB appreciation strengthens, this market is increasingly becoming an arbitrage market. If the renminbi is not expected to appreciate or the renminbi is freely convertible, there is no room for arbitrage in the offshore renminbi market, which is understandable. But in fact, the renminbi has been appreciating for a long time, so the renminbi (offshore renminbi) in Hong Kong has become a sweet pastry. Everyone wants the renminbi because it can appreciate, so in the appreciation cycle, the exchange rate of offshore renminbi will be significantly higher than the onshore renminbi exchange rate, in the context of appreciation expectations and exchange control, Hong Kong’s renminbi is more sought-after. Conversely, under the anticipation of depreciation, people in Hong Kong who hold RMB want to convert to US dollars and Hong Kong dollars as soon as possible, and the exchange rate of offshore RMB will be lower than that of onshore RMB. There are many interpretations of the exchange rate difference between the two. First of all, the exchange rate difference can be regarded as the expectation of future appreciation of the onshore RMB.
Through impulse response function analysis, we find that the offshore RMB exchange rate spread responds to the impact of different economic factors in different degrees and directions: (1) For the offshore RMB exchange rate spread itself, it is positive for the exchange rate difference. The impact is long-term. The disturbance is two-way, with a positive strengthening as a whole, and occasionally an intermittent rebound; (2) For the stock of offshore RMB funds, the short-term impact on the exchange rate difference is greater, and the cumulative impact is counterproductive to the exchange rate difference (3) For domestic and foreign interest rates, it has always had a positive impact on the exchange rate difference, but this effect cannot last for a long time; (4) As for the RMB appreciation and depreciation expectations and the risk appetite of global investors, they have a positive effect on the exchange rate difference. The impact is often bidirectional, but the latter has a higher interference frequency. But in the long run, the former has a positive effect on the exchange rate difference, while the latter has a weaker impact. (5) On the whole, the offshore RMB market has a relatively high degree of internationalization and a strong ability to absorb information, which is manifested as a relatively obvious short-term impact on shocks, but this disruptive effect is not continuous.