Offshore RMB (CNH) is funded by The People's Bank of China and the Hong Kong Monetary Authority. CNH is the currency used by domestic and foreign investors to trade and transact in China. Like other currencies, USD/CNH and USD/CNY may experience short-term fluctuations, but stability can also be expected in the long-term.

The Role of PBoC

The People's Bank of China (PBoC) is the monetary and policy setting institution in China which determines the interest rate level and the required reserve ratio (RRR) for financial institutions.

The Function of Offshore RMB

With the globalisation of the RMB, individual and institutional traders can now trade the offshore RMB using the MT4 platform. The growing maturity of offshore RMB will add to the diversity and depth of the global forex market. This also means that private investors as well as institutional traders can have a more efficient means of trading and accessing the Chinese market through RMB.

Example

A Chinese student who pays the tuition fee in US dollars needs to consider the fluctuations in the exchange rate as well as the fees associated with converting from one currency to the other.

For example, if the tuition fee is US$50,000, any change in the USD/CNH exchange rate can have an impact on the total amount. If the exchange rate on USD/CNH falls from 6.6530 to 6.1162, the amount required will increase from 306,000 to 333,000 RMB. This means the student has to pay 27,000 RMB more due to the exchange rate fluctuation.

A Chinese merchant imports goods worth US$1million will pay another 535,800 RMB.

In many cases, importers and merchants use forex trading as a risk management and hedging tool for their business.

Any currency risk involved in business transactions can be reduced to a certain extent using forex trading. If the merchant purchased 1million USD/CNY, he only needs US$10,000 margin to open up a trade using up to 100:1 leverage.

Any loss or gain in the physical currency transaction can be offset by the corresponding gain/loss in the forex trade.

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