Commerzbank analysts report that USD/CNY is trading near 6.78, with their model implying a slightly stronger PBoC fixing versus the previous day. The Yuan is being influenced by China’s decision to tap domestic oil reserves rather than bid aggressively in global markets. Rising producer prices and subdued consumer inflation highlight margin pressures but have not yet triggered sharp FX moves.

Domestic oil reserves buffer Yuan impact

"China's factory gate inflation accelerated in May, with the PPI rising 3.9% yoy vs 2.8% in April. This was driven by a global energy crisis triggered by the war in Iran alongside a surge in AI infrastructure investments. In contrast, the CPI rose by 1.2% yoy, matching our expectation but missing the Bloomberg consensus of 1.3%. Core CPI, which excludes volatile food and energy costs, slowed to 1.1% vs 1.2% in April."

"This widening divergence pushed the gap between factory and consumer prices to its widest level since June 2022. This indicates severe margin compression for downstream manufacturers who are struggling to pass on elevated raw material costs amid intense domestic competition."

"Meanwhile, to manage the fallout from the ongoing war in Iran, Beijing has begun drawing down commercial and strategic crude stockpiles rather than competing for expensive crude oils in the international market. Satellite data indicates that China tapped nearly 25mn barrels of crude in the month to 7 June."

"Daily inventory draws are projected to average approximately 1mb/d over the coming months. This volume represents about a third of the supply lost to China following the near-closure of the Strait of Hormuz, a drop that remains manageable given the country's estimated 1.2bn barrels in total reserves."

"This reliance on domestic stockpiles has kept the impact of the global oil shock relatively muted. Beyond tapping reserves, structural changes in China’s transport system have given the economy flexibility during this energy shock. State-owned refiners have slashed processing rates to record lows and fuel exports have been limited under wartime preservation rules."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)