When China engineered a mini-devaluation of the yuan in August, it succeeded in closing the prior gap between the fix (central reference rate) and the spot onshore yuan. One of the prices of doing so, however, was the widening of the gap between the onshore (CNY) and offshore (CNH) yuan.
This widening caused stress on those global investors who had long CNH positions. Some were long CNH via Dim Sum bonds. Others used the CNH market to overlay other investments. Imagine buying a sterling bond and then selling sterling and buying CNH, for example. CNH, the offshore yuan fell more than the onshore yuan, which the PBOC appeared to be supporting.
As this Great Graphic, created on Bloomberg illustrates the gap has closed dramatically today. The upper chart shows the onshore yuan (orange line) and the offshore yuan (white line). The lower chart shows what happened to the spread. The spread peaked near 0.1138 at the start of the week. Now it is at about 0.006. This is the smallest spread since the mini-devaluation on August 11.
Of course we should not draw any hard conclusions from one day action. It is important that is sustained. Closing the gap between spot and the fix was important because through that the PBOC can meet an operational requirement for joining the SDR. That requirement involves being able to give to the IMF a representative market price every day so the IMF can value the SDR. Previously the gap between the fix and the spot market made this impossible.
The closing of the gap between the on and offshore yuan is important because it addresses the ease of access. It improves the use of the offshore yuan as a proxy (for hedging purposes) of CNY exposures. These two metric, the relationship between spot onshore yuan and the daily fix and the relationship between CNY and CNH seems more important than the previous focus of comparing daily fixes with each other.
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