On May 26, the USD/CNY exchange rate closed below 6.4, a new high since June 2018, and appreciation expectations have heated up over the past week (since May 19), with the RMB having appreciated 0.49% against the USD, faster than the 0.14% depreciation of the USD index. Are Chinese policymakers intent on reducing inflation through RMB appreciation? We think it is less likely.

  First, the PPI is rising rapidly, but the CPI is not high.

  The PPI has risen rapidly from negative to 6.8% year-over-year in just 4 months, and has averaged 1% YoY since last November, also substantially higher than the previous 5-year average of 0.2%. However, regardless of the overall CPI year-on-year (0.9% in April), non-food CPI (1.3%), excluding pork CPI (1.4%) despite the upward trend, but far below the target of 3%. the rapid rise in PPI is mainly driven by the rise in bulk prices, how much of which is imported and how much is due to domestic factors? Oil prices, copper prices rise international factors have a greater impact (international supply is less than demand), but from March to early May, domestic bulk (steel, aluminum, power coal) prices rise to take over the international bulk, more domestic supply constraints brought about, not imported, exchange rate appreciation has little impact on this.

  Secondly, since November, oil and copper prices have risen by 85% and 60% at their peak, and the PPI indices of oil extraction, oil processing and non-ferrous smelting industries have also risen by 16%-40%, and the impact of a small appreciation of the exchange rate on these inflationary effects is also very limited.

  More importantly, the appreciation of the RMB will increase the pressure on the export manufacturing industry. While exchange rate appreciation can certainly reduce the cost of raw material imports, it will also reduce the revenue from exported finished goods to a greater extent (raw material costs are only part of total inputs or total output). Since the middle of last year, the RMB exchange rate has appreciated 12% against the dollar, more than the rate of appreciation of major developed and emerging currencies, the downstream manufacturing industries with high export dependence (such as instruments, clothing, shoes and hats, communications and computers, wood furniture, electrical machinery, metal products, etc.) profit margins have been squeezed (we measured at 0.5-2 percentage points).

  Further, inflation and exchange rates are both prices, the former is the internal price of money, the latter is the external price of money, both are often the result of real financial supply and demand. The inflation upturn and RMB appreciation some time ago were the result of China leading the global recovery. However, looking ahead, we expect China’s recovery to enter the second half, with growth momentum or weakening and limited room for RMB appreciation or even a small depreciation, with the RMB fluctuating in both directions.