One Currency, Two Forward Prices: The Onshore-Offshore Renminbi Puzzle
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.
Cite
@article{arxiv.2605.25392,
title = {One Currency, Two Forward Prices: The Onshore-Offshore Renminbi Puzzle},
author = {Samuel Drapeau and Peng Luo and Xuan Tao and Tan Wang},
journal= {arXiv preprint arXiv:2605.25392},
year = {2026}
}