The People's Bank of China recently released a major policy statement on the renminbi exchange rate, drawing widespread market attention.
Since 2025, the renminbi has fluctuated in both directions and appreciated in an orderly manner, with the renminbi gaining about 9% against the US dollar cumulatively and recently rising to around 6.70 to 1.
Against this backdrop, the central bank's statement has puzzled the market: the exchange rate is clearly strengthening, so why respond so prominently now to questions about "undervaluation"? The answer lies in the external environment.
For some time, certain Western economies have attributed China's strong foreign trade to an undervalued renminbi and argued that the renminbi should appreciate substantially. In the market's view, the central bank's decision to release its policy stance at this time is both a direct response to external pressure and a way to build an accurate and complete narrative and position on the renminbi exchange rate.
Based on the views of several authoritative market experts, this official text sends a clear signal: the renminbi exchange rate is determined by market supply and demand, China does not preset exchange rate targets, does not intervene in long-term trends, and has no intention of gaining competitive advantage through currency depreciation. Experts also believe that the current renminbi exchange rate can hardly be called undervalued, that trade surpluses and exchange rates do not have a causal relationship, and that the root of global imbalances lies in deficit countries themselves and in the inherent contradictions of the international monetary system, requiring countries to jointly advance structural reforms.
Has the Renminbi Exchange Rate Been Undervalued?
Market supply and demand determine the renminbi exchange rate. Has the renminbi been undervalued or intervened? For some time, there have been Western voices questioning whether the renminbi exchange rate is insufficiently market-oriented and transparent, attributing depreciation and slow appreciation to central bank intervention.
How exactly is the renminbi exchange rate formed? The central bank gave a clear response: China implements a managed floating exchange rate regime based on market supply and demand and adjusted with reference to a basket of currencies. It insists on letting the market play a decisive role in exchange rate formation. The central bank does not preset exchange rate targets and does not intervene in long-term exchange rate trends, and since 2017 it has exited routine foreign exchange intervention. The central bank's bottom line is to prevent sharp short-term depreciation from affecting financial stability. During major external shocks such as the pandemic and the tariff war in April 2025, it used macroprudential tools to adjust expectations and even intervened directly in extreme scenarios to correct the "herd effect" and the self-reinforcing spiral of irrational depreciation expectations. Such practices are consistent with international rules and practice and are not unique to China. In July 2026, the yen once fell to a nearly 40-year low against the US dollar, which also triggered joint intervention by relevant countries.
So, has the renminbi exchange rate been undervalued? "It is hard to say there is obvious misalignment." Guan Tao, chief economist at Huafu Securities, believes that whether an exchange rate is overvalued or undervalued refers to the deviation of the market exchange rate from the equilibrium exchange rate, and the equilibrium exchange rate is the rate corresponding to a state in which the economy achieves both internal and external equilibrium at the same time. The renminbi now faces a conflict between internal and external equilibrium: from the perspective of the external sector's trade surplus and excess foreign exchange supply over demand, it is positive for the renminbi, but from the perspective of the domestic sector's strong supply and weak demand and negative interest rate spreads at home and abroad, it is negative for the renminbi.
In July 2026, the International Monetary Fund (IMF) released its 2026 External Sector Report, assessing China's external position in 2025 as "stronger than warranted" and stating that the median gap for the renminbi's real effective exchange rate was -21.3%. Some views mistakenly cite the IMF's external balance assessment to the renminbi's nominal exchange rate and use it as "official evidence" for exchange rate accusations. In fact, the IMF assessed the renminbi's real effective exchange rate using three methods, and the results differed greatly and even pointed in opposite directions. "Therefore, the IMF's assessment results should be used prudently," Guan Tao said, noting that the IMF's policy recommendations for China are mainly structural adjustment policies such as actively expanding domestic demand, rather than pushing for renminbi appreciation.
Wen Bin, chief economist at China Minsheng Bank, believes that after years of development, China has gradually formed a fully functional multi-level foreign exchange market system, and market supply and demand play a decisive role in renminbi exchange rate formation. Since 2026, the US dollar index and US Treasury yields have risen relatively quickly, non-US currencies have generally depreciated, and the renminbi has still generally continued its appreciating trend against the US dollar. The renminbi's stable performance itself is strong proof of the effectiveness of China's exchange rate regime.
Is the Trade Surplus Due to the Exchange Rate?
There is no significant causal relationship. For some time, discussion of China's surplus has been heating up. In the eyes of some Western economies, this has been interpreted as the "credit" of an undervalued renminbi. To this claim, market experts give the opposite answer: there is no significant causal relationship between trade surpluses and exchange rates, and both are jointly affected by economic transformation. "The rise in China's trade surplus in recent years should not be attributed to changes in the renminbi exchange rate," said Zhang Wenlang, chief macro analyst at CICC Research.
Generally speaking, an upward financial cycle suppresses the current account but pushes up the domestic currency exchange rate, while a downward financial cycle pushes up the current account and suppresses the domestic currency exchange rate. Zhang Wenlang said that in recent years, one manifestation of China's economic transformation has been the peaking and turning of the financial cycle: adjustment in the housing market, deleveraging by the private sector, rising savings, and slowing imports; social resources flowing from real estate to more efficient sectors such as manufacturing, improving production efficiency and supporting exports, which has accelerated the rise of domestic goods and slowed imports; and housing market adjustment leading to lower prices of non-tradable goods represented by home prices, that is, a decline in the internal real exchange rate, which lowers intermediate input costs for tradable goods and promotes exports. In the process of the financial cycle turning down, falling home prices also drove declines in related stock sectors, weakening the motivation to allocate funds to domestic assets for a time, which led to a weaker nominal exchange rate.
Zhang Wenlang believes that under such circumstances, although China's trade surplus rose in recent years, export enterprises' motivation to convert foreign exchange was once weak and did not provide corresponding support for the domestic currency exchange rate. At the same time, housing market adjustment and weak domestic demand and prices also led to a weaker real exchange rate. It can be seen that surpluses and exchange rates are not mutually causal. In fact, since the 2005 exchange rate reform, the renminbi exchange rate has fluctuated in both directions, with alternating cycles of appreciation and depreciation and obvious two-way fluctuation characteristics. But past rounds of renminbi appreciation did not affect China's trade development, and China's export share did not rise faster during depreciation periods. Changes in exchange rate appreciation and depreciation do not correspond to changes in export share. From 2005 to 2008, the renminbi appreciated 21% against the US dollar, from 2010 to 2014 it appreciated 10%, and from 2020 to 2021 it appreciated 9%; during the same periods, China's share of global exports rose by 2.4, 2.8, and 1.7 percentage points, respectively. In contrast, in 2016 the renminbi depreciated 7% against the US dollar, and in 2022 it depreciated more than 8%; during the same periods, China's share of global exports fell by 0.7 percentage points each time.
Wen Bin believes that China's trade growth mainly benefits from its super-large market, complete industrial chains and infrastructure system, abundant, high-quality, and hardworking labor resources, and continuous R&D and innovation capabilities. China has never promoted exports by pushing the renminbi lower. Even when relevant countries launched trade wars and the Federal Reserve raised interest rates sharply, the People's Bank of China still adopted timely macroprudential policy measures to prevent excessive depreciation of the renminbi exchange rate. Since 2025, the renminbi has fluctuated in both directions and appreciated in an orderly manner, with the renminbi gaining about 9% against the US dollar cumulatively and recently rising to around 6.70 to 1.
In Guan Tao's view, this rebound in the renminbi is precisely the result of China's strong exports, the trade surplus's support for the fundamentals of foreign exchange supply and demand, and the boost to market confidence from the economy's development toward new and better-quality growth. It is a concrete manifestation of adhering to the decisive role of the market in exchange rate formation. "In the first eight months of this year, China's export price index averaged 105.32, meaning export prices rose by an average of 5% year on year." Guan Tao believes this reflects a rising price contribution to export growth, or stronger non-price competitiveness, further confirming that China's trade development stems from the improvement of industrial international competitiveness. China has no need and no intention to gain trade competitive advantage through currency depreciation.
Who Is Responsible for Global Imbalances?
The solution lies in joint reform by all countries. As discussion of global imbalances heats up, some people habitually turn their eyes to China's surplus and the renminbi exchange rate. However, this simple attribution to the "exchange rate" does not hold. How should global imbalances be resolved? The central bank's attitude is clear: it is not the unilateral responsibility of surplus countries or deficit countries, and all parties need to address it jointly.
Guan Tao said bluntly that simply attributing the complex problems of the international monetary system and economic structure to the renminbi exchange rate is shifting blame onto others and does not help solve the problem. Empirical research shows that China's foreign trade imports and exports are not sensitive to exchange rates, and the goods trade or current account surplus does not have a linear relationship with the renminbi exchange rate. The advisable path is for all countries to formulate medium- and long-term policy plans around structural reforms and implement them firmly.
Wen Bin also said that simply attributing a country's declining industrial competitiveness, weakened fiscal and financial constraints, and complex structural problems to other countries' exchange rates is an evasion and avoidance of one's own adjustment responsibilities. Where does the root of the imbalance lie? On the one hand, it lies in the deficit countries themselves. "Domestic policy problems in deficit countries cannot all be transformed into exchange rate adjustment responsibilities for other countries. For example, in recent years, the US trade deficit with China has fallen, but its overall trade deficit has not reversed, showing that the US trade deficit is largely related to the US itself," Zhang Wenlang believes.
On the other hand, it is related to the inherent contradictions of the international monetary system. In recent decades, the world's major surplus countries have constantly rotated, while the major deficit countries have remained unchanged. Since the 1970s and 1980s, the international division of labor has undergone multiple adjustments, with current account surpluses shifting dynamically from Japan and Germany to South Korea, China's Taiwan, China's Hong Kong, and Singapore, and then to China's mainland and ASEAN; Germany and South Korea have manufacturing shares above the global average and have long maintained current account surpluses. The central bank believes that in an international monetary system dominated by a single sovereign currency, the issuer of the main reserve currency can carry out debt and fiscal expansion for a relatively long period, supporting high consumption and low savings, and thereby forming a long-term trade deficit. This will also, to a certain extent, weaken that country's fiscal and financial constraints and manufacturing competitiveness, increasing debt and balance of payments risks.
Zhang Wenlang proposed that global rebalancing must face up to the United States' own low savings and high fiscal deficit. At present, its unemployment rate is at a historic low, but its fiscal deficit is high. Maintaining a high fiscal deficit while the economy still grows at a certain pace will inevitably lead to a wider trade deficit if the private sector does not sufficiently increase savings or reduce investment. If this savings-investment relationship is not improved, relying only on tariffs or demanding that other countries' currencies appreciate will be difficult to fundamentally eliminate the US overall external deficit.
As for the solution, at a recent meeting of G20 finance ministers and central bank governors, People's Bank of China Governor Pan Gongsheng already proposed that resolving global imbalances requires countries to promote their own structural reforms. Deficit countries should reduce fiscal deficits and raise their savings rates, while surplus countries should appropriately promote consumption and investment growth. At the same time, it is necessary to uphold multilateralism and strengthen international cooperation. Solving global imbalances should focus on medium-term commitments. All countries should formulate medium- and long-term policy plans, make clear commitments, and implement them firmly, avoiding repeated flip-flops.
Guan Tao believes that China is firmly implementing the 15th Five-Year Plan, persisting in advancing the transformation of its economic growth model, accelerating the construction of a new development pattern, and contributing to a new round of dynamic global economic balance. Wen Bin said that as a responsible major country, China will in the future firmly implement the strategic direction and key measures set by the 15th Five-Year Plan, persist in advancing the transformation of its economic growth model, expand domestic demand and high-level opening up, and promote the global economy's development in a more open, inclusive, and balanced direction; at the same time, China will continue to deepen market-oriented reform of the renminbi exchange rate, enhance exchange rate flexibility, strengthen expectation management, prevent cross-border capital flow risks, and keep the renminbi exchange rate basically stable at a reasonable and balanced level.