Rejecting the Devaluation Charge
The PBOC said China neither needs nor intends to gain a trade advantage through depreciation and has never done so. It argued that countries blaming their industrial decline and weak fiscal discipline on other nations' exchange rates are avoiding necessary adjustments. The bank said the market decides the exchange rate, that it sets no target level, does not intervene in long-term trends, and allows two-way movement. It also committed to report more foreign-exchange data to the IMF from 2027 and tied its currency framework to the 2026–2030 plan's demand-led growth model.
Europe's Industrial Depression
The EU's trade deficit with China reached €360.6 billion in 2025, up 15%, while China's global surplus stands near $1.2 trillion, about 6% of GDP. ECB President Christine Lagarde called on global leaders in June to discuss yuan undervaluation, and German Chancellor Friedrich Merz called the currency 25% to 30% undervalued. German imports from China rose 6.2% to €72.4 billion in the first five months of 2026, and Chinese hybrid exports to the EU grew from about 3,800 units in October 2024 to nearly 50,000 in July 2026 after the EU exempted hybrids from electric-vehicle tariffs, risking a second "China Shock" from a new export wave. The ECB's Export Similarity Index between China and EU countries has also risen, concentrated in Germany, led by machinery and transport equipment.
Valuation Models Versus Real Rates
The IMF's 2025 Article IV consultation estimated the real effective exchange rate was 12% to 21% undervalued, and Goldman Sachs said in May that some models show more than 20%, forecasting 6.50 per USD within a year. Deutsche Bank projected 6.55 and HSBC 6.65 by year-end. The PBOC countered that the real effective rate includes relative price levels, so China's low inflation depresses it even when the nominal yuan is stable or rising, and that isolated model estimates do not prove undervaluation. The IMF's own advice centered on domestic demand and structural reform rather than nominal appreciation, which weakens the European case.
Why Currency Adjustment Cannot Fix Trade
The PBOC's strongest claim is that trade no longer follows the exchange rate. China's export share rose 2.4 points when the yuan gained 21% between 2005 and 2008 and rose 2.8 points when it gained 10% between 2010 and 2014, yet it fell 0.7 points in both the 2016 and 2022 depreciations. Global trade is now about 1/70th of foreign-exchange trading volume, down from 1/35th in the 1990s, so the bank argues it can no longer steer long-term rates. China's current-account surplus was 3.8% of GDP in 2025, and Goldman raised its 2026 forecast to 4.3%, though the IMF expects the surplus to narrow. Real adjustment must come from China's domestic demand transition, because a nominal currency move would destabilize export regions before consumption-led growth is established.
Investor Positioning
Investors should treat the yuan as a slowly appreciating, structurally supported currency rather than a policy tool, with Goldman's 6.50 target implying 3% to 4% upside from around 6.7. European industrial equities are in danger that a stronger yuan would barely relieve, since ECB research shows China's export similarity rising and its reliance on European industrial imports steadily falling since 2019. Global macro portfolios should rely less on currency forecasts when projecting goods inflation, because Chinese export prices now reflect technology, scale, and supply-chain density more than exchange rates. RMB internationalization is a measured, long-term thesis, targeting to be the fifth-largest payment currency with a 3.13% share in January 2026, and the planned IMF data reporting supports gradual credibility.
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