(Dec 16): In well-connected circles within China, the yuan’s persistent weakness is increasingly being seen as an obstacle to the country’s growth.
A rising number of Chinese economists and former central bank officials are arguing a stronger currency is needed if the country is to rebalance the economy away from exports, boost tepid consumer demand and reduce trade conflicts.
Open discussions about such a sensitive subject as currency management are notable in President Xi Jinping’s China, where policy decisions are typically opaque. The calls are fuelling speculation that policy makers will allow broader appreciation in the managed currency, which Goldman Sachs Group Inc estimates is undervalued by a quarter relative to economic fundamentals, although few expect a substantial rise.
“It’s significant that there is an internal debate about the costs and benefits of continuing with China’s weak yuan policy,” said Brad Setser, a senior fellow at the Council on Foreign Relations and a former US Treasury official. “A weak yuan has real costs for China’s consumers and the broader economy.”
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The Chinese currency lost 13% in value against the dollar in the three years through 2024 as a protracted real estate slump and growing US rivalry weighed on the economy and dried up foreign investment inflows. While the yuan has eked out an almost 4% gain this year, that’s come against a backdrop of declines against most major peers, including a 9% drop versus the euro.
Recently the People’s Bank of China (PBOC) has been seen acting to limit strength in the yuan, which is allowed to trade up to 2% either side of a daily fixing. Since late November, the central bank has mostly set the reference rate at weaker than estimated levels, while state-owned banks have been buying dollars, according to traders.
The country’s economic policy makers last week reiterated a pledge to keep the yuan basically stable on a reasonable equilibrium. The PBOC didn’t immediately reply to a faxed inquiry for comment.
Broad declines in the yuan have come as exports surged this year, helping to rescue an economy weighed down by sputtering consumer spending and acute price wars that are fuelling deflationary pressure. In a stark illustration of the imbalance in demand China is facing, the country recorded a US$1 trillion trade surplus in goods in the first 11 months of the year.
A stronger yuan is seen as a partial remedy to fix that divergence, which is drawing growing international concern. In recent days, French President Emmanuel Macron called China’s surplus “unsustainable,” the International Monetary Fund said the yuan’s depreciation was fuelling trade imbalances, and Mexico greenlit tariffs on Chinese goods.
China’s real effective exchange rate, which is the currency value adjusted for prices, is close to the lowest since 2011, according to data from the Bank for International Settlements.
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“China’s foreign trade strategy requires a major adjustment in the next five years,” Liu Shijin, a former member of the PBOC’s monetary policy committee, said in a speech this month in Beijing. “It’s necessary to achieve a basic balance between imports and exports.”
A “reasonable” appreciation in the currency would increase purchasing power overseas and boost consumption, as well as help widen global usage of the yuan, said Liu.
Sheng Songcheng, a former director of the PBOC’s statistics and analysis department, last month highlighted the disconnect in the yuan’s value based on purchasing power parity, or the prices of similar goods and services in different countries. The yuan last traded at 7.05 per dollar.
“From the perspective of purchasing power parity, the exchange rate wouldn’t be 1 to 7 — it might be 1 to 5 or even 1 to 4,” Sheng said in a speech at a conference in Shanghai. “That implies undervaluation and the yuan has significant room to appreciate more.”
How much the yuan should strengthen is a matter of debate.
A 50% gain in the yuan in five years would accelerate the pivot to high-quality development and lure more foreign investment, Weijian Shan, executive chair of private equity firm PAG, wrote in a column published in the Financial Times on Nov 28.
Allowing the currency to strengthen 10%-30% in the medium to long term would be one option to narrow the trade surplus and increase the value of China’s non-trade industries such as services, Zhang Jun, dean of the School of Economics at Fudan University, said in a Nov 23 speech at a forum in Shanghai.
Zhang Ming, deputy director of the Institute of Finance & Banking at the Chinese Academy of Social Sciences, called for a 4% increase in the real exchange rate to help the country avoid the middle-income trap faced by developing countries, according to a Dec. 7 note.
To be sure, some see a stronger yuan more as a political tool than a solution to addressing the country’s growing trade surplus. They argue the real issue behind the surge in exports is the fall in prices domestically, which is allowing Chinese companies to aggressively undercut overseas rivals.
Factory deflation extended into a 38th month in November as overcapacity persisted and consumption remained weak. Retail sales grew just 1.3%, the slowest pace on record excluding the pandemic, while fixed-asset investment continued to shrink.
“Yuan appreciation could help to ease trade tensions, but I don’t think it would have a major impact on the trade imbalances, which are rooted in China’s weak consumption relative to industrial output,” said Duncan Wrigley, chief China economist at Pantheon Macroeconomics.
China’s top leaders made strengthening domestic demand their top economic priority for 2026, the Communist Party’s decision-making Politburo pledged this month.
Unless Beijing takes accompanying measures to effectively stabilise the property market and consumption, the drag a stronger yuan would likely have on export growth may deepen deflation, according to Ting Lu, chief economist at Nomura Holdings Inc. That, ironically, could renew depreciation pressure on the currency, Lu wrote in a report last week.
“Using yuan appreciation to reduce the trade surplus may not be the best strategy for Beijing,” said Lu. “Instead, we think Beijing should raise the ‘real yuan exchange rate’ by ending deflation.”
Cautionary tale
Still, the growing chorus of voices calling for gains both internally and outside the country is increasing pressure on Chinese policy makers to shift strategy.
Few expect a sudden rise in the yuan. Some cite comparisons to the Japanese yen’s rapid appreciation in the wake of the 1985 Plaza Accord — which helped fuel asset bubbles and financial instability. Meanwhile, a shock one-off devaluation in the yuan in 2015 caused gyrations in markets and undermined confidence in the government’s handling of the exchange rate.
Analyst projections so far foresee mild gains, if at all. Goldman Sachs predicted in late November the yuan will advance to 6.85 per dollar in 12 months, while Deutsche Bank AG estimates the currency will climb to 6.7 in 2026. Morgan Stanley sees little change, with the yuan ending at 7.05.
“I think they will promote a stronger yuan, but in a controlled fashion as they will be worried about exports,” said Wrigley. “A big appreciation is out of the question. Policymakers view the Plaza Accord and Japan’s subsequent asset market bubble collapse as a cautionary tale which China must avoid replicating at all costs.”
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