Determinants of CNY/USD Exchange Rate (2000 Q1 –
2025 Q4)
1. Introduction
In this report, the determinants of CNY/USD exchange rate are analyzed based on the
quarterly data between 2000 Q1 and 2025 Q4. The research concentrates on four important
macroeconomic variables which include inflation (CPI YoY), interest rates (discount rate),
income (GDP growth), and foreign exchange reserves (government control).
The aim is to test the direction and strength of the relationship between these variables and
the exchange rate through correlation analysis and also to explain the results in terms of the
international finance theory.
2. Methodology
It is analyzed on the basis of 104 quarterly observations made on the basis of credible
secondary sources. Excel was used to determine the relationship between each independent
variable (X) and the dependent variable (CNY/USD exchange rate, Y) by using the
CORREL function.
The following is the interpretation framework:
● A positive correlation means that the exchange rate is rising (CNY is depreciating)
with an increase in the variable.
● A negative relationship implies that the exchange rate declines (CNY appreciates)
with an increase in the variable.
● Strength is classified as weak (< 0.40), moderate (0.40–0.69), or strong (> 0.70).
3. Correlation Summary
The findings suggest that the exchange rate is largely affected by foreign exchange reserves,
and inflation, interest rates, and growth of GDP are weakly correlated.
4. Factor-by-Factor Analysis
4.1 Inflation (CPI YoY %) vs CNY/USD Exchange Rate
(a) Data Analysis
The inflation data of 2000-2025 illustrates several stages, with deflation (early 2000s, 2015,
and 2023-2024) and high inflation (2007-2008 due to food and energy prices). Inflation was
fairly stable between these extremes in 2009-2019.
The exchange rate over the same period showed periods of appreciation and depreciation and
no steady trend that was in tandem with the inflation movements.
(b) Relationship Explained (Movement & Direction)
The CNY/USD exchange rate has a negative relationship with inflation with a correlation of
-0.1949. This implies that an increase in inflation is marginally linked with an appreciation
of CNY, which is in contrast to theoretical expectation.
The history of high inflation rates (e.g., 2007-2008) demonstrates that the CNY appreciated,
yet the currency did not systematically appreciate when there was deflation. This
discrepancy shows how weak inflation is as an explanatory variable.
(c) Theoretical Support (PPP Framework)
The Purchasing Power Parity (PPP) indicates that currency depreciation should be caused by
high domestic inflation. A weak and negative relationship is observed; however, it means
that the theory has been violated mainly because of the managed exchange rate system that
China has and the intervention by the central bank.
Hence, the CNY/USD rate is not highly determined by inflation since the policy intervention
weakens the theoretical relationship.
4.2 Interest Rate (Discount Rate %) vs CNY/USD Exchange Rate
(a) Data Analysis
The interest rate policy of China shows a regulated and slow adjustment route. Following the
2008 financial crisis, the rates dropped substantially to promote economic recovery and have
been fairly stable over a long period before again falling after 2020.
In the meantime, there were appreciation and depreciation cycles of the exchange rate that
were not explicitly correlated with the interest rates.
(b) Relationship Explained (Movement & Direction)
The interest rates and the exchange rate have a correlation of -0.0339, and this is a very weak
negative relationship. This implies that fluctuations in interest rates have a nearly
insignificant effect on the exchange rate.
(c) Theoretical Support (Interest Rate Parity – IRP)
As per the Interest Rate Parity (IRP), this implies that with increased domestic interest rates,
capital inflows are expected to increase and cause appreciation of the currency. In the case of
China, however, capital controls reduce the cross-border flows, undermining the
transmission mechanism that the theory suggests.
Thus, interest rates do not play a critical role in determining the CNY/USD exchange rate
because of limited capital mobility and control of policies.
4.3 Income (GDP Growth YoY %) vs CNY/USD Exchange Rate
(a) Data Analysis
The growth of China GDP in the period between 2000 and 2025 can be split into three
supercycles.
The initial period (2000-2007) is characterized by high growth of 8.1-14.2 percent, and a
slow rise of the currency. The second phase (20082019) comprises the financial crisis around
the world, recovery period, and structural stagnation, whereby the exchange rate moved
towards depreciation. The third phase (2020–2025) reflects the shock of COVID-19, the
sharp growth and the following normalization of the growth, and the exchange rate is held in
a very slim band.
(b) Relationship Explained (Movement & Direction)
GDP growth and the exchange rate have a weak positive correlation 0.2680. It indicates that
there is a positive relationship between high growth and a small currency depreciation.
Nevertheless, there are particular periods of mixed dynamics. Appreciation was favored by
high-growth phases that were associated with a high level of export and inflow of capital and
depreciation was caused by slows. Policy intervention tended to have an effect on these
effects or override them.
(c) Theoretical Support
Under the Balance of Payments, the rising income raises imports and leads to depreciation
pressure, whereas the robust growth may bring capital inflows and lead to the appreciation
pressure. It is the net effect that depends on which channel predominates.
In China, the historical export-led growth was conducive to appreciation, and recent
structural changes and policy priorities have undermined this association. The Mundell-
Fleming model and asset market approach also explicate the relationship between growth
expectations and exchange rates.
The exchange rate is weakly and inconsistently correlated with GDP growth and not a major
driver of CNY/USD changes.
4.4 Government Control (FX Reserves) vs CNY/USD Exchange Rate
(a) Data Analysis
The foreign exchange reserves of China have been rising drastically since 2000 by USD 158
billion to about USD 4 trillion in 2014 due to long-term trade surpluses and capital inflows.
This was due to a significant decrease in 2015-2016 when reserves were spent to stabilize the
currency and a further stabilization period since 2017.
Such movements are much more consistent with the trends of exchange rates.
(b) Relationship Explained (Movement & Direction)
The exchange rate shows a very strong negative relationship with the FX reserves (r= -
0.9297). This means that the CNY appreciation is closely linked with the growth in reserves.
Contrary to other variables, FX reserves show a direct indication of central bank interference.
The accumulation of reserves is normally seen when the central bank buys foreign currency
to control the appreciation and reserve depletion when aiding the currency during
depreciation.
(c) Theoretical Support
A managed exchange rate regime is the best explanation of this relationship, which is backed
by Impossible Trinity. China has exchange rate stability and monetary independence through
limiting the capital flows.
The central bank can directly affect the exchange rate by sterilized intervention without
having a significant impact on domestic liquidity. The model of portfolio balance also
describes the effect of massive reserve accumulation on the dynamics of asset allocation and
the exchange rate around the world.
Hence, the largest determinant of the CNY/USD exchange rate is the FX reserves, which
depict the direct government intervention of the currency movements .
5. Conclusion
The discussion illustrates that traditional macroeconomic fundamentals do not play a
significant role in influencing the CNY/USD exchange rate. The exchange rate has weak
correlations with inflation, interest rates and GDP growth, which suggests that they do not
explain exchange rate variations.
Conversely, foreign exchange reserves depict a very strong relationship, and this points to
the predominance of government intervention. This proves that China works on a managed
exchange rate regime where policy decisions and central bank activities prevail over market
forces in the determination of currency movement.
On the whole, the results highlight that the CNY is not a free-floating currency, and its
performance should be interpreted in the framework of institutional regulation, capital
controls, and policy-driven economic strategy, but not necessarily the abstract theoretical
frameworks.