RMB Exchange Rate and Inflation

The USD to CNY Exchange Rate has experienced a sharp rise this month, but China’s CPI changes have been milder. 

Since the pandemic, the unprecedented stimulus policies and supply chain disruptions in developed countries have triggered global inflation. As the downward pressure on the Chinese economy increases, it is imperative to stabilize growth. The combination of exchange rate depreciation and imported inflation has aroused many concerns.

The nominal effective exchange rate trend of the RMB has little correlation with China’s CPI and has a tendency to gradually weaken, while the correlation with PPI and import and export prices is higher.

In the one-way transmission mechanism, the exchange rate can, directly and indirectly, affect China’s consumer prices. Due to the relatively low proportion of import consumption in China, the direct impact of the exchange rate on the Consumer Price Index is relatively limited. Therefore, it is mainly based on indirect transmission and cost promotion.

However, whether the transmission is smooth or not is still affected by economic expectations and monetary environments. 

The state of the economy, not the exchange rate, is the most important factor affecting the CPI in China. Therefore, the Chinese government should do a good job of stabilizing the supply of commodities and monitoring market prices to help alleviate the concerns of inflation outbreaks, while also stabilizing monetary policy expectations and strengthening market confidence.