Despite being in a legal gray area, cross border CNH-CNY spread arbitrage remains an extremely profitable, risk-free technique that leverages exchange rate differences in China’s dual currency regime. Moreover, in the past year, much of these profits have been earned from American desks reacting to Fed announcements. This kind of arbitrage has relied heavily on using non-resident accounts to process transactions between the currency using import/export or special account structures to process settlement, purchase, and transfer. Recent regulatory trends into 2026 however, indicate that CNH-CNY arbitrage rules are shifting rapidly to prevent criminal usage of non-resident accounts.

Contents

• Overview of CNH-CNY Spread Arbitrage
• Non-Resident Accounts as the FOREX Vehicle
• CNH-CNY Spread Arbitrage Techniques
• Regulatory Hurdles Are Increasing

Overview of CNH-CNY Spread Arbitrage

The CNH, standing for “Chinese Yuan in Hong Kong” is usually priced higher than the RMB’s mainland currency classification, because the currency has a small circulating volume and can be freely traded. It was introduced by the government in 2010 to internationalize the RMB, and is the variant traded outside mainland China. In 2010, the central bank and Hong Kong Monetary Authority amended the Hong Kong RMB Clearing Agreement.

This made Hong Kong CNY denominated accounts available to corporate customers and permitted banks to offer customers FX conversion services for non-trade current account transactions, establishing a market position for offshore RMB quotes. Offshore trading liquidity began to improve as more banks such as Bank of China Hong Kong added offshore quotes.

The foundational offshore market RMB transaction system and its diversified products emerged in June 2011. The PBOC authorized the Hong Kong Financial Markets Association to provide offshore CNH spot rates using a benchmark of 15 active banks’ CNY exchange rate quotations. The CNY exchange rate is the price movement for mainland China transactions, and onshore RMB is heavily regulated despite being well established. The CNY exchange rate is heavily determined by the central bank’s policies because it’s a major player in FOREX markets. Exchange rates for CNH and CNY are determined differently and circulate in different environments; you can optimize your cross-border transaction settlement strategy and risk control by understanding each.

Differences between CNH and CNY

Different regulatory frameworks apply, specifically the CNY market is subject to the PBOC Central Parity Fixing Guidelines and a ±2% fluctuation band; capital account foreign exchange trades are limited to genuine transactions. The Hong Kong based CNH market is exposed to global financial volatility because it can be converted without restrictions with a free-floating exchange rate.

Different pricing approaches are used for exchange rates; CNY is determined by central bank policy adjustments, whereas CNH is determined by international investor expectations that drive offshore market supply and demand. Their price gap can surge due to sudden policy changes or external shocks, such as how the Fed’s 2025 rate hike caused a historical extreme where the CNH depreciated 1.7%, or 1000 base points, over the CNY.

Some traders point out much of the 2025 arbitrage opportunity was captured by New York based organizations. If we look closely at the timeline, the Fed statement was released in the middle of the night on China time, but when exchanges were still open.

Different liquidity sources exist, for CNY it’s controlled by the Chinese banking regulations such as the reserve requirement ratio, but for CNH is determined by RMB deposit volume and cross-border finance. CNH HIBOR leaps above SHIBOR when liquidity is tight, like where the June 2025 data show a 25-basis point spread between the overnight CNY HIBOR rate at 1.57% and SHIBOR at 1.32%.

An arbitrable divergence between onshore/offshore exchange rates is driven by capital control differences because CNY is decided by policy and CNH by real supply and demand. The opportunity is recurring because it’s a result of institutional segmentation. Certain accounts can be used to provide cross-market liquidity whenever exchange rate differences go above transaction costs—usually >0.3%.

Appreciation arbitrage is available when CNH appreciates faster and is at a discount, and you can borrow offshore RMB and exchange it to the onshore market to take advantage of interest and exchange rate differences.

Depreciation arbitrage is available when CNH depreciates faster than CNY and it’s at a premium, and you can use a non-resident account for onshore FOREX purchases and make exchanges in the offshore market. For example, when CNY is at 6.40 and CNH at 6.43, a $30,000 profit is made on each $1 million exchanged.

Non-Resident Accounts as the FOREX Vehicle

Multi-currency non-resident accounts opened by offshore organizations in domestic Chinese banks have advantages for arbitrage because they can transact freely across borders. In China, a non-resident account is opened at a Chinese or foreign bank by an offshore organization, including Hong Kong, Macao, and Taiwan, available to either Chinese or foreign customers, it’s not an offshore account (OSA) or free trade account (FT). An account operated by a domestic Chinese bank is nonetheless walled off from mainland China business accounts and subject to foreign exchange controls.

Accounts for foreign exchange are subject to foreign exchange bureau rules, whereas RMB accounts fall under the PBOC. Regulation is complex, and there are different rules by account type for fund transfer, FOREX transactions, and financing.

Foreign exchange transactions between domestic and foreign parties’ foreign exchange accounts are treated as cross-border transactions. A domestic Chinese foreign exchange account can be used to make account transfers, remit to an offshore account, and make international payments. Bank account balances are subject to short-term external debt quota regulation except as otherwise provided by SAFE. Security interests in Chinese organizations’ international loan balances are subject to domestic rules for both loans and FOREX.

Laws on Non-Resident Account

Lawmakers desiring to prevent capital control evasion and money laundering have enacted a complex legal regime to ensure accounts are used only for lawful purposes. Withdrawing foreign currency in cash from a foreign entity’s domestic Chinese foreign exchange account or conversion of account funds into domestic currency requires local SAFE office approval. More recently, they have been allowed to convert into domestic currency if within an FTZ.[1][2]

The rules allow offshore organizations to open an RMB denominated bank account for cross-border services but are ineligible for cash services nor can balances be converted to foreign currency.[3] Offshore organizations are entitled to one basic deposit account in China, and also to open general deposit accounts and special-purpose deposit accounts as needed. When opening accounts, banks review NDRC approved documentation for authenticity, compliance, and completeness. Foreign investors can open accounts for purposes such as nonperforming loan acquisition, RMB denominated loans, RMB denominated lending, currency swaps, and distributing A-share public company dividends.

Basic deposit accounts are used for ordinary RMB transfers; general deposit accounts are used for loans and other payments. Transfers between domestic Chinese organizations and non-resident accounts are treated as cross-border transactions, whereas transactions with foreign accounts can be directly processed.[4] Non-resident accounts are demand deposit accounts that can be used for same-currency financing in China, and the rules permit them to be converted into time deposits.[5] Domestic Chinese banks may also open accounts for foreign businesses for international loan services.[6]

FOREX regulations allow freely transferring the funds between foreign accounts, and with approval RMB balances can be converted to foreign currencies and remitted outside China. Initially intended for import/export, these accounts are widely used in arbitrage to cycle funds without needing an underlying transaction.

If you need help with these issues, take a look at CBL’s legal services page.

CNH-CNY Spread Arbitrage Techniques

Several techniques are still being used to arbitrage these currencies within non-resident accounts.

Cash-market basis arbitrage uses an offshore entity to purchase foreign currency at the CNY exchange rate in a China non-resident account, e.g., $1 million for ¥6.4 million, then transfer USD to the Hong Kong offshore market where it’s exchanged to CNY at the CNH rate, in this case ¥6.43 million at a 6.43 rate. The profit on the cycle is 0.47%. Assume the CNH-CNY spot exchange rate difference is 150 points. 11 round trips of ¥600 million results in about ¥1.46 million, and cumulative profits can reach millions of Yuan.

Trade-finance arbitrage uses a Chinese entity to sign reverse import/export contracts with Hong Kong affiliates. The Chinese entity pays in dollars when importing, purchasing foreign currency in China, while the affiliate exchanges currency in Hong Kong. The Chinese entity, exports, receiving payment in CNY, completing a cycle. The bonded warehouse zone “one-day trip” model can significantly reduce logistics costs. Round trips using bonded warehouse zones can significantly reduce transport costs.

Back-to-back trade finance arbitrage involves transforming a cross-border RMB loan into foreign currency lending—an offshore entity lends to a domestic Chinese entity and converts CNH to USD which is then lent to the Chinese entity, which then buys foreign currency to repay the foreign debt, and the offshore entity converts the USD back to CNY.

The approach complies with rules that the same currency is used for cross-border loans as repayments in China. A Chinese entity borrows foreign denominated funds which are repaid in the same currency, profiting from cross-border exchange rate differences within their cross-border lending quotas.

Compliance Risks Must be Managed

Expert advice on any arbitrage strategy is necessary, because China takes its laws about capital controls extremely seriously. In a representative case dating back to 2015, the Jinhua, Zhejiang police discovered an underground bank using non-resident accounts for illegal cross-border transfers. The principal offender illegally made ¥20 million in 10 months by forming dozens of shell companies in Hong Kong and used over 850 accounts to transfer over ¥100 billion yuan across borders, operating in Beijing, Guangdong, Ningxia, Anhui, and Jiangxi.

The police found Zhao Mouyi and accomplices used non-resident account loopholes and limited foreign currency purchase restrictions outside China to make exchanges at HSBC Hong Kong, and transfer it to accounts designated by buyers. They registered dozens of Hong Kong shell companies and hired people to falsify sales contracts, exploiting bank compliance loopholes to transfer large amounts of money.

Regulatory Hurdles Are Increasing

Since the same techniques effective for arbitrage are useful for money laundering, rules designed to prevent crime create hurdles for arbitrage. In 2019, the Financial Action Task Force’s (FATF) fourth AML evaluation cited a need for cross-border account transparency to improve. Regulators require real economic transactions to underlay funds transfers, which prevents churning funds for arbitrage.

China Internet Finance Association Director Lu Zheng characterized beneficial ownership as the right to profits or control over a legal entity or plan, i.e. trust. Criminals have sought to circumvent improved AML capabilities by using complicated equity and control structures to manipulate legal entities and trusts to obfuscate beneficial ownership. In recent years, the international community has pushed to track movement of assets by enabling law enforcement agencies by transparently looking through entity and trust structures to see beneficial ownership. This was a key point raised by the FATF.[7]

Data shows non-resident account openings fell 50% YOY in 2025, amid foreign bank policies requiring an outbound direct investment filing to open one. Some Chinese banks have followed suit and increasingly combined ODI with non-resident accounts, meaning that customers without an ODI filing cannot open accounts, which excludes shell companies or entities with no actual operations.

Conclusion

In recent years, the foreign exchange bureau imposed criminal liability for evasion on fictitious import/export foreign currency transactions. Improvements to AML under the China common reporting standard have imposed transparency under the look-through approach are making it harder to use non-resident accounts. Due to the rapidly changing rules in this area, and shifting regulatory priorities, businesses should obtain expert advice before proceeding with any CNH-CNY arbitrage plan. If you need help with these issues, take a look at CBL’s legal services page.

Footnotes

[1] SAFE Offshore Organizations’ China Forex Account Administration Circular, (国家外汇管理局关于境外机构境内外汇账户管理有关问题的通知), (SAFE, Jan. 7, 2019), (in Mandarin)

[2] SAFE Genuine Compliance Review Reform Circular, (国家外汇管理局关于进一步推进外汇管理改革完善真实合规性审核的通知), (SAFE, Jan. 26, 2017), (in Mandarin)

[3] Offshore Organization CNY Bank Settlement Account Administrative Procedures, (境外机构人民币银行结算账户管理办法), (PBOC, Mar. 31, 2012), (in Mandarin)

[4] PBOC – Offshore Organizations’ CNY Bank Settlement Account Opening and Use Circular, (中国人民银行关于境外机构人民币银行结算账户开立和使用有关问题的通知), (PBOC, Jul. 5, 2013), (in Mandarin)

[5] PBOC General Office – Offshore Organizations’ CNY Bank Settlement Account Opening and Management Circular, (中国人民银行办公厅关于调整境外机构人民币银行结算账户资金使用有关事宜的通知), (PBOC, Jan. 20, 2016), (in Mandarin)

[6] PBOC & SAFE – Bank Financial Institution Global Lending Services Circular, (中国人民银行 国家外汇管理局关于银行业金融机构境内外贷款业务有关事宜的通知), (SAFE, Mar. 1, 2022), (in Mandarin)

[7] Experts Comments on China Anti-Money Laundering and Anti-Terrorism Financing Report: Advancement of China’s Anti-Money Laundering and Anti-Terrorism Financing Efforts, (专家解读《中国反洗钱和反恐怖融资互评估报告》：继续推动中国反洗钱和反恐怖融资工作向纵深发展), (Financial News, April 19, 2019), (in Mandarin)