As China's onshore (CNY) and offshore (CNH) RMB markets remain segmented, the CNH–CNY basis is a recurring source of opportunity and risk for FX traders, corporate treasurers and asset managers. This guide walks you step-by-step through measuring the basis, choosing instruments, executing trades, hedging exposures and controlling risks in 2026 market conditions.

What is the CNH–CNY basis and why it matters

The CNH–CNY basis is the spread that reflects differences in funding costs, liquidity and capital‑control frictions between offshore RMB (CNH, typically traded in Hong Kong, Singapore and other centres) and onshore RMB (CNY, traded onshore in mainland China). Practically, traders measure the basis as the difference in forward points (or forward rates) for the same tenor between offshore deliverable forwards (or CNH forward market) and onshore forwards/NDFs referencing CNY.

The basis matters because it:

  • Signals cross‑border funding stress or capital‑flow dislocations;
  • Creates arbitrage or carry opportunities when covered interest parity does not hold;
  • Affects the cost of hedging RMB exposures for corporates and investors;
  • Presents liquidity and settlement risk differences between NDFs, deliverable forwards and swaps.

Step 1 — Establish a clear definition and measure the basis

Before trading, pick a consistent market definition for the basis and stick to it. Common measures:

  • Forward‑points basis: forward_points(CNH) − forward_points(CNY) for the same tenor.
  • Forward‑rate basis: forward_rate(CNH) − forward_rate(CNY) expressed in pips or basis points.
  • NDF vs deliverable forward spread: NDF_rate(USD/CNY) − deliverable_forward_rate(USD/CNH) adjusted to the same quoting convention.

Example (worked): Suppose spot USD/CNH = 7.2000 and USD/CNY spot = 7.2000 (same spot for simplicity). For 3M, offshore forward points = +1200 pips (0.1200) so USD/CNH 3M = 7.3200; onshore 3M forward points = +900 pips (0.0900) so USD/CNY 3M = 7.2900. The 3M basis in forward points = 1200 − 900 = 300 pips (0.0300). Expressed relative to spot, this is ≈ 417 bps annualised (roughly 0.03/0.072 over 3 months scaled to a year) — use the convention your desk prefers. Always note quoting conventions (USD/CNH vs CNH/USD) to avoid sign errors.

Step 2 — Choose instruments: pros and cons

Key instruments to trade or hedge the basis:

  • CNH deliverable forwards — cash settlement in CNH offshore; direct, lower basis risk for offshore holders but liquidity varies by tenor and time of day.
  • NDFs (USD/CNY) — settled in USD against onshore reference rate; widely used where onshore deliverables are restricted. NDF liquidity is strong for standard tenors but subject to counterparty margining.
  • CNH/USD swaps and FX swaps — used to implement carry and to lock funding costs; helpful in basis trades involving funding mismatches.
  • Short‑term deposits / onshore interbank products — necessary when you want to implement covered carry using onshore rates, but access is restricted to licensed institutions or clients.

Instrument selection depends on counterparty relationships, regulatory constraints, settlement preferences and margining costs. For non‑resident corporates with RMB exposures, NDFs are often the pragmatic hedge. For desks that can access CNH deliverable forwards and unsecured funding offshore, direct CNH forwards are preferred.

Step 3 — Common strategies and when to use them

Below are practical strategies and decision criteria.

1) Hedging an onshore CNY receivable

  1. If you can deliver/receive CNH offshore, use a CNH deliverable forward (match currency and tenor) to avoid NDF settlement mismatch.
  2. If you cannot access CNH settlement, use an NDF (USD/CNY) for the same tenor and be explicit about settlement currency, P&L dynamics and counterparty margin.

2) Trading the basis for carry

  1. Enter a position that exploits the forward spread — for example, borrow onshore (if you can) and invest offshore, or vice versa, capturing the forward‑points differential after funding costs and transaction fees.
  2. Ensure financing, collateral and legal ability to operationalise the carry (onshore deposit access, repo markets, swap counterparties).

3) Arbitrage between NDF and deliverable forwards

When NDF and CNH forward price diverge materially, arbitrageurs may use USD funding and swap lines to capture the spread. Execution requires tight counterparty lines and the ability to settle cross‑border cashflows without incurring prohibitive costs.

Step 4 — Execution: best practices

  • Consolidate streaming quotes from multiple liquidity providers (banks and ECNs) and watch hidden/off‑hours liquidity in Hong Kong and Singapore.
  • Use limit orders for large tenor trades to avoid moving the market; small tenors can often be executed OTC with voice or RFQ.
  • Stagger execution to avoid concentrated rollover risk near Chinese holidays or central-bank fix times.
  • Confirm tenor conventions and settlement instructions in trade tickets — confusion between calendar/spot convention causes costly failures.
  • Monitor and manage margin: NDFs often carry initial and variation margin requirements; deliverable forwards may be unsecured or collateralised — verify credit lines.

Step 5 — Hedging architecture and P&L mechanics

Create a clear mapping from your economic exposure to contract terms:

  • Exposure: e.g., export invoice denominated in CNY payable in 90 days (onshore).
  • Hedge instrument: NDF USD/CNY 90‑day or CNH deliverable forward 90‑day (if deliverable CNH can be used).
  • P&L mechanics: NDF settles in USD difference between contracted rate and fixing reference; CNH forward settles in CNH offshore.

Example hedge P&L (simplified): Exporter expecting CNY 10,000,000 in 90 days, wants USD certainty. If using NDF and the NDF fixes higher (CNY weakens), exporter receives more USD; if CNY strengthens, exporter receives less. Always model both FX and basis scenarios to estimate potential P&L and margin calls.

Step 6 — Risk management and stress testing

Key risks and mitigants:

  • Liquidity risk: maintain multiple LPs and monitor depth across HK/Singapore trading hours; avoid rolling large positions on thin holiday windows.
  • Settlement/counterparty risk: confirm settlement currency and clearing arrangements; prefer cleared counterparties for large NDF portfolios where available.
  • Funding risk: plan funding for carry trades; model intraday and tenor mismatches and repo haircut changes.
  • Regulatory risk: track onshore capital control guidance and reporting requirements for CNH/CNY flows; keep treasury and legal teams involved for cross‑border transactions.
  • Model and basis risk: test sensitivity to basis moves, especially when cross‑hedging using USD/CNH and USD/CNY pairs; quantify P&L attribution between spot FX moves and basis shifts.

Operational checklist before placing a basis trade

  1. Define exact measure of basis and tenor you will trade.
  2. Confirm instruments, settlement currency and margining with counterparty.
  3. Validate funding sources for the trade duration and worst‑case margin scenarios.
  4. Check holiday and fixing calendars for onshore and offshore markets.
  5. Run a notional P&L, liquidity and collateral stress test (adverse basis move, 1–5 day liquidity shock).
  6. Obtain pre‑trade approval per internal limits and document trade rationale in ticket.

Monitoring and exit rules

Maintain an intraday and daily monitor for:

  • Onshore policy announcements, PBOC publications and State Council statements that can affect onshore liquidity;
  • CNH liquidity metrics (bid‑ask spread, depth) and NDF market volumes;
  • Interbank repo rate moves, USD funding spreads and USD/CNH basis ticks;
  • Margin calls and variation margin requirements from counterparties.

Exit rules should be explicit: time‑stop (max tenor exposure), basis threshold (wide/narrow beyond which you unwind), or liquidity triggers (if bid/ask widens beyond X bps). Document automated alerts for these triggers.

Practical P&L example — 3M basis capture

Hypothetical example to illustrate mechanics (numbers illustrative):

  • Spot USD/CNH = 7.20, spot USD/CNY = 7.20.
  • 3M deliverable forward USD/CNH = 7.32 (forward points +1200).
  • 3M onshore forward/NDF USD/CNY = 7.29 (forward points +900).
  • 3M basis = 0.03 USD (300 pips). If you can borrow USD at cheaper cost offshore and lend onshore (or synthesize via swaps), you could capture a portion of the 300‑pip spread after financing and transaction costs.

Calculate expected gross carry: for a USD 10m notional, a 300‑pip difference equals USD 30,000 nominal over 3 months. Subtract funding costs, transaction fees, bid/ask and credit charges to arrive at net carry. Always annualise and express expected return relative to capital at risk (margin and potential haircut) to compute return on capital.

Final notes — governance, counterparties and continuous learning

Trading the CNH–CNY basis sits at the intersection of FX, funding markets and China market structure. Maintain strong governance: pre‑trade approvals, a documented hedging mandate, and post‑trade reconciliation. Develop relationships with multiple regional banks and prime brokers that demonstrate sustained market‑making capacity in CNH.

Markets evolve: keep a watch on onshore reform signals, offshore liquidity shifts, and the growth of derivative venues that could change execution costs. Back‑test strategies using recent tenor data, but prioritise real‑time liquidity tests and operational readiness over historical alpha alone.

Quick checklist — summary

  • Define your basis measure and tenor.
  • Choose instrument (CNH forward vs NDF) aligned to settlement and regulatory constraints.
  • Confirm funding and margin before trade; run stress tests.
  • Execute with multiple LPs; avoid concentration at roll/holiday windows.
  • Monitor basis, liquidity and policy headlines; set clear exit rules.

When executed with disciplined measurement, appropriate instruments and tight operational controls, CNH–CNY basis trades can be a durable part of an FX desk's toolkit. The keys are precision in quoting conventions, realistic funding plans, and robust controls for liquidity and regulatory shifts.