The renminbi is back at the center of debates about global macroeconomic imbalances. With China's merchandise trade surplus widening to $1.2 trillion in 2025, and with its manufacturing sector becoming increasingly dominant, the near-consensus among financial and economic commentators is that the renminbi is significantly undervalued. The implication is that China should let its currency appreciate sharply, thereby shrinking its surplus, easing competitive pressure on manufacturers elsewhere, and helping rebalance the global economy.
This argument is politically convenient, because it points to a seemingly painless solution. Unfortunately, it suffers from a fatal flaw. Before simply assuming that exchange-rate appreciation is appropriate for China, one must examine the underlying cause of the currency's weakness. If it was primarily the result of deliberate interventions to expand exports, rapid appreciation would indeed be a relatively clean remedy. But if it reflects weak domestic demand, allowing the currency to appreciate without addressing the underlying weakness would be counterproductive.
China falls into the second category. The renminbi's weakness and the widening surplus are better understood as parallel consequences of a deep adjustment in the real-estate sector. Property was once a central engine of Chinese demand, credit creation, local-government finance, household wealth, and investment. When the property market suffers, so does domestic demand, particularly investment demand. And when investment falls faster than national saving, the external surplus rises.
China is not unusual in this respect. CF40 Research has identified a clear pattern: housing busts have improved economies' external balances. That is what happened previously in the United States and Japan, where weak domestic demand also led to persistently low inflation. While the renminbi's nominal exchange rate has been quite stable against both the US dollar and a basket of currencies in recent years, high global inflation and low domestic inflation have produced a large real depreciation. It is not a weak currency that has undermined domestic demand and led to large external surpluses; it is the opposite.
The renminbi's exchange rate matters, but how it adjusts matters more. An appreciation driven by an economic recovery would be welcome. If the property sector stabilizes, household confidence improves, productive investment rises, and imports grow, the currency would strengthen as part of the broader rebalancing. But too abrupt an appreciation would not repair China's property market or revive domestic demand. On the contrary, it would hurt the export sector and the investment and consumption that it supports. The impact on global imbalances would be ambiguous, but it would almost certainly slow China's recovery, potentially leading to weaker growth for a world economy that would be no less unbalanced.
The rest of the world therefore has a big stake in how China adjusts. China has become a price anchor for a large part of global manufacturing, since producer prices increasingly shape goods prices elsewhere, even when the final product is not imported directly from China. In fact, weak Chinese demand and a low renminbi exchange rate have helped restrain goods inflation in advanced economies, though this benefit receives far less attention than the competitive pressure China places on foreign producers. The post-COVID disinflation in advanced economies was a case in point. It came not only from tighter monetary policies and repaired supply chains, but also from soft Chinese manufactured-goods prices.
Sharp currency appreciation would push in the opposite direction, raising the price of Chinese exports. The result would feel less like a painless rebalancing than a cost-push shock. Such an adjustment would not promote factory construction in Europe, higher productivity in the US, or improvements in China's property market. It would simply increase the global prices of manufactured goods at a time when inflation in many advanced economies remains elevated. Some foreign producers might welcome the easing of Chinese competition, but central banks' job would get harder.
Bond markets would also feel the effects. Expectations of higher inflation and tighter monetary policy would increase pressure on nominal yields at a time when advanced economies are already drawing down global savings. With the US running large fiscal deficits, Europe preparing for more spending on defense and infrastructure, and AI investments creating enormous demand for capital, the need for savings from the rest of the world has grown.
In this context, one must remember that China's surplus is the counterpart of Chinese net savings supplied to the rest of the world. If China absorbs more at home, less Chinese savings will be available to finance deficits abroad. That could drive a healthy adjustment if deficit countries were to save more and borrow less. But failing that, bond yields—which have already climbed to multi-year highs—must continue to rise.
None of this means that China should hold down its currency artificially. Rather, it should try to rebalance by strengthening domestic demand. That means stabilizing the property sector, improving household income expectations, expanding social insurance, and shifting investment toward more productive uses. Such policies would narrow the surplus more durably than exchange-rate adjustment alone. The renminbi would duly strengthen as the recovery takes hold.
But deficit countries have responsibilities, too. They cannot demand smaller Chinese surpluses while continuing to count on cheap imported goods, disinflationary pressure, and abundant foreign savings. If advanced economies want China to absorb more of what it produces, they must show more fiscal discipline themselves.
Copyright: Project Syndicate, 2026.www.project-syndicate.org
