Fluctuations in the external value of China's currency and in its balance of trade and international payments had psychological and economic effects which aggravated the problem of inflation.
The Chinese currency standard had been changed from one based on full convertibility in silver to a managed foreign exchange standard only two years before the outbreak of the Sino-Japanese war. Deprived of the right to cash their notes, the public had come to look upon fluctuations in the foreign exchange rate for Chinese paper currency as a substitute for the fluctuations in the value of silver which formerly had measured the value of their money. Foreign exchange rates therefore acquired a new significance. Furthermore, China had long been a country which imported more than it exported. The supply of manufactured goods, raw materials, and even foodstuffs was so dependent on imports that the price of imports dominated the general price structure. As a result, changes in the external value of Chinese currency, and the increase or decrease in imports, affected not only the price of imported commodities but also the price of goods produced within China, including even agricultural products.
Meanwhile, China's foreign reserves against her own currency had traditionally been small because her balance of trade had always been adverse and domestic gold production was insignificant. The size of foreign reserves was extremely sensitive to changes in the balance of payments and in turn provided little cushion for maintaining the stability of the external value of the country's currency.