The offshore renminbi, which is traded by foreign investors, has hit its biggest discount to the official onshore rate since 2011, indicating markets believe the Chinese currency has further to depreciate after the nation's central bank unexpectedly devalued it this week.
On Thursday, the offshore rate traded at a 1 per cent discount to its onshore counterpart, which was the biggest since October 13, 2011. The gap had been trimmed to 0.8 per cent on Friday, with the onshore renminbi fetching Rmb6.312 to the US dollar and the offshore rate at Rmb6.4408, writes Peter Wells.
The offshore renminbi has depreciated 3.6 per cent this week, while the onshore rate has weakened by 2.9 per cent.
The divergence between the two exchange rates may unsettle the People's Bank of China, which has an ultimate goal for them to converge as it works to gradually give market forces more influence over its still-heavily controlled currency.
In a rare press conference on Thursday, the People's Bank of China said there was no basis for markets to expect a continued depreciation in the renminbi. It also set the reference rate slightly stronger against the US dollar on Friday morning at Rmb6.3975.
"You'd assume the PBoC would prefer an orderly depreciation," TD Securities Asia-Pacific strategist Annette Beacher told FastFT. "And so far the market does seem mature enough to handle a new regime in a short space of time."
The onshore rate, known as CNY, is the renminbi's exchange rate when traded on the mainland. The offshore rate, CNH, is the rate when the renminbi trades elsewhere, mostly in Hong Kong. The onshore rate can only trade 2 per cent either side of the PBoC's daily fix. The offshore rate is not limited by a trading band, however, and is viewed as a proxy for where international markets believe the renminbi should be against the dollar.
Historically, the spread between the two exchange rates has been relatively small owing to the fact the onshore renminbi is kept on a tight leash and investors were not expecting the PBoC to take steps to change its currency regime.
