As China’s growth loses momentum, a rare public debate is unfolding over the impact of a weak yuan. Economists and former central bank officials say the currency’s long-term softness may be dragging on the economy, an unusual development in a system where exchange-rate policy is normally kept out of public view and is now attracting attention at home and abroad.
A growing group of Chinese economists and former policymakers argue that a stronger yuan is needed to move the economy away from export dependence, lift subdued consumer demand, and ease trade frictions. The discussion itself is notable under President Xi Jinping, as it fuels speculation that authorities could allow broader appreciation in the tightly managed currency. Goldman Sachs Group Inc. estimates the yuan is undervalued by a quarter relative to economic fundamentals, though few expect a sharp 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.”
The yuan fell 13% against the dollar in the three years through 2024, pressured by a prolonged property downturn and intensifying US rivalry that deterred foreign investment. While it has gained almost 4% this year, that increase has come alongside declines against most major currencies, including a 9% drop versus the euro.
The People’s Bank of China has recently been seen acting to curb yuan strength. The currency is permitted to trade within 2% of a daily fixing, and since late November the central bank has largely set that reference rate weaker than market estimates, while state-owned banks have been buying dollars, traders said. Policy makers reiterated last week that they would keep the yuan basically stable at a reasonable equilibrium.
Exports have surged this year, helping to offset weak domestic demand and intense price competition that has added to deflationary pressure. In the first 11 months of the year, China posted a US$1 trillion surplus in goods trade, underlining the imbalance in demand.
A stronger yuan is viewed by some as a partial remedy amid mounting international concern. French President Emmanuel Macron recently described China’s surplus as “unsustainable”, the International Monetary Fund said yuan depreciation was fuelling trade imbalances, and Mexico approved tariffs on Chinese goods.
China’s real effective exchange rate, adjusted for prices, is near its lowest level since 2011, according to Bank for International Settlements data. “China’s foreign trade strategy requires a major adjustment in the next five years,” said Liu Shijin, a former member of the PBOC’s monetary policy committee, speaking this month in Beijing. “It’s necessary to achieve a basic balance between imports and exports.” Liu said a “reasonable” appreciation would raise overseas purchasing power, boost consumption and support wider global use of the yuan.
Sheng Songcheng, a former head of statistics and analysis at the PBOC, last month pointed to the gap between the yuan’s market value and its level under purchasing power parity. The currency 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 at a conference in Shanghai. “That implies undervaluation, and the yuan has significant room to appreciate more.”
Views differ on how far the yuan should rise. Weijian Shan, executive chair of private equity firm PAG, wrote in a Financial Times column on Nov 28 that a 50% gain over five years would speed the shift to high-quality development and attract foreign investment. Zhang Jun, dean of the School of Economics at Fudan University, said in a November 23 speech that a 10%-30% rise over the medium to long term could narrow the trade surplus and lift the value of non-trade sectors such as services. Zhang Ming, deputy director of the Institute of Finance & Banking at the Chinese Academy of Social Sciences, called for a 4% rise in the real exchange rate in a December 7 note.
Risks to exports and deflation
Others caution that currency appreciation may be more of a political signal than a solution to trade imbalances. They argue that falling domestic prices, rather than exchange rates, are enabling Chinese exporters to undercut overseas rivals. Factory deflation extended into a 38th month in November, while retail sales rose just 1.3%, the weakest pace on record outside the pandemic. Fixed-asset investment continued to contract.
“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 leadership this month made boosting domestic demand its main economic priority for 2026. Without parallel steps to stabilise the property market and consumption, a stronger yuan could weigh on exports and deepen deflation, according to Ting Lu, chief economist at Nomura Holdings Inc. That could, in turn, renew depreciation pressure on the currency, he wrote last week. “Using yuan appreciation to reduce the trade surplus may not be the best strategy for Beijing,” Lu said. “Instead, we think Beijing should raise the ‘real yuan exchange rate’ by ending deflation.”
Despite rising pressure on policy makers, few expect abrupt moves. Comparisons are often drawn with the yen’s rapid rise after the 1985 Plaza Accord, which preceded asset bubbles in Japan, or with China’s own one-off devaluation in 2015 that unsettled markets. Forecasts point to modest changes at most. Goldman Sachs sees the yuan at 6.85 per dollar in 12 months, Deutsche Bank AG predicts 6.7 in 2026, and Morgan Stanley expects little change, with the currency ending at 7.05.
“I think they will promote a stronger yuan, but in a controlled fashion as they will be worried about exports,” Wrigley said. “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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