CNY-CNH rates divergence is likely to persist through to the end of the year as a mix of lacklustre data, tariff threats and a strong USD hit. China’s economic data has been lacklustre and now face additional threats in 2025 from likely US tariffs. If Trump imposes 60% tariffs on Chinese imports, this could shave off 4-7% total Chinese exports, posing meaningful downside to growth for China. Accordingly, the PBoC is likely to take a more defensive stance, and we see further easing over the coming year (another 10bps this month followed by 50bps in 2025). Domestic IRSs will come under downward pressure amidst expectations of an extended period of loose PBoC policy.
By contrast, CNH rates tend to be more sensitive to external factors. USD weakness peaked around mid-September, and this coincided with the period where the 2Y CNH/CNY spread was at -20bps (very tight by recent standards). Since then, the spread has widened to around 60bps. Most of this is driven by a combination of a resurgent USD and worries about Trump’s policies. While US tariffs put downward pressure on onshore rates, offshore rates get driven higher amidst RMB weakness. Moreover, CNH liquidity may get tightened to provide additional stability if the currency gets too volatile. Meanwhile, seasonal liquidity tightness should also hit frontend CCS rates. Accordingly, while we see curve steepening in the onshore curve, the CNH curve is likely to experience curve flattening over the coming weeks. 
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