Commerzbank analysts report that the USD/CNY is trading near 6.78, with their model suggesting a slightly stronger People's Bank of China (PBoC) fixing compared to the previous day. The Chinese Yuan is currently being shaped by Beijing's strategic decision to utilize domestic oil reserves instead of aggressively purchasing crude oil on the global market, a move prompted by the ongoing war in Iran and the resulting global energy crisis [1].
China's factory gate inflation, as measured by the Producer Price Index (PPI), accelerated to 3.9% year-over-year in May, up from 2.8% in April. This increase was attributed to the global energy crisis and a surge in AI infrastructure investments. In contrast, the Consumer Price Index (CPI) rose by 1.2% year-over-year, which matched Commerzbank's expectations but fell short of the Bloomberg consensus of 1.3%. The core CPI, which excludes volatile food and energy prices, slowed to 1.1% from 1.2% in April. This widening gap between factory and consumer prices marks the largest divergence since June 2022, indicating severe margin compression for downstream manufacturers who are unable to pass on higher raw material costs due to intense domestic competition [1].
To mitigate the impact of the energy shock, China has drawn down nearly 25 million barrels of crude oil from its commercial and strategic reserves in the month leading up to June 7, according to satellite data. Daily inventory draws are expected to average about 1 million barrels per day in the coming months, which is roughly one-third of the supply lost due to the near-closure of the Strait of Hormuz. This drawdown is considered manageable given China's estimated 1.2 billion barrels in total reserves [1].
The reliance on domestic oil stockpiles has helped keep the impact of the global oil shock on the Yuan relatively muted. Additionally, structural changes in China's transport system have provided the economy with greater flexibility during this period. State-owned refiners have reduced processing rates to record lows, and fuel exports have been limited under wartime preservation rules [1].
CONCLUSION
China's strategic use of domestic oil reserves and adjustments in its refining sector have cushioned the Yuan from the full impact of the global energy shock. While margin pressures for manufacturers are intensifying, the overall FX market reaction has remained subdued, reflecting the effectiveness of Beijing's current approach.