Chinese yuan undervaluation under fire from global think tanks
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Global think tanks are pressing Beijing to strengthen the Chinese yuan, warning that its undervaluation fuels trade tensions and distorts the Chinese economy.
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The Chinese flag is pictured in front of the façade of the Chinese embassy in Berlin on April 22, 2024. (AFP)
A growing number of European and American economists and policy experts are urging Beijing to strengthen the Chinese yuan, warning that prolonged undervaluation risks escalating trade tensions and distorting the Chinese economy.
In recent weeks, at least three think tanks, including the US-based Council on Foreign Relations (CFR) and the UK-based Official Monetary and Financial Institutions Forum, have published analyses highlighting the yuan’s suppressed real value and its role in sustaining China’s export competitiveness.
The calls coincide with ongoing US-China tariff negotiations, raising expectations that currency policy could emerge as a discussion point. The debate also intersects with China’s stated aim of boosting domestic demand and reducing reliance on exports.
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Undervaluation’s impact on the Chinese economy
Mark Sobel, former US Treasury official and US chairman of the OMFIF, wrote on August 6 that it is time for Chinese authorities to allow the renminbi to “appreciate substantially.” He pointed to estimates showing the yuan undervalued by 8.5% (IMF) to over 20% (Brookings Institution).
The Bank for International Settlements’ real effective exchange rate (REER) measure, a common benchmark for currency value, places the yuan at its weakest since 2011. This is attributed partly to price deflation from weak domestic demand and a softer exchange rate against China’s trade-weighted currency basket.
Juergen Matthes of the German Economic Institute argued in a July 23 study that the yuan’s undervaluation against the euro contributes significantly to Europe’s trade deficit with China. He called for “urgent trade policy action,” noting that China is redirecting exports to non-US markets amid geopolitical strains.
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While the People’s Bank of China (PBOC) maintains it does not pursue competitive devaluation, its policy of keeping the yuan “basically stable” has not prevented depreciation against 19 of China’s 24 main trading partner currencies this year.
US and European perspectives on China trade
CFR senior fellow Brad Setser noted that despite strong exports, the yuan’s depreciation could feature prominently in the next US Treasury foreign exchange report. The department stopped short of labeling China a currency manipulator in June but criticized Beijing’s lack of transparency over currency practices.
Setser argued that China’s leadership appears “content to grow on the back of net exports” and is underestimating how its exchange-rate stance affects global perceptions of the Chinese economy.
Markets are watching whether China’s campaign against industrial overcapacity and recent modest increases in the PBOC’s daily yuan fixings signal a sustained strengthening trend. A stronger Chinese yuan, economists say, would boost real incomes, support domestic consumption, and align with policy goals to grow the non-tradable sector.
Sobel emphasized that such a move would also help China counter deflationary pressures and advance its “anti-involution” strategy to curb excessive market competition. While the yuan has gained 1.7% against the US dollar this year, analysts agree that a more significant shift is needed to address its long-term undervaluation.
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