Picture this: China's currency is climbing in value, yet its exports are surging like never before. It's a paradox that challenges everything we think we know about international trade—and it's happening right now.
ORLANDO, Florida, December 3 (Reuters) – At first glance, China's ambition to fuel its economy through relentless export growth seems incompatible with the ongoing rise in the value of its currency. Yet, these two trends are thriving side by side, underscoring the delicate and often unpredictable link between a nation's exchange rate and its international trade dynamics.
Since April, the People's Bank of China has guided the yuan upward by 3%, pushing it to 7.07 per dollar—the highest it's been in over a year. Experts anticipate this upward trajectory will persist, with forecasts suggesting the dollar could dip below 7.00 yuan in the coming year, potentially reaching 6.60 yuan. This would mean an additional 7% boost in the yuan's value, reverting to levels not seen since 2022.
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But here's where it gets controversial: Insights from the Communist Party's leadership gathering in October, known as the plenum, reveal a clear hesitation in Beijing to shift away from its heavy reliance on exports for economic progress.
This stance is understandable, given the ongoing challenges in China's home market—like the aftermath of a collapsed real estate bubble, persistent deflation, and sluggish consumer demand. According to Goldman Sachs, exports have accounted for over half of China's real GDP growth in the headline figures over the past two years. It's like a lifeline keeping the economy afloat amid domestic turbulence.
You might wonder: If the yuan is gaining strength, shouldn't that make Chinese products pricier and less appealing to global buyers? And this is the part most people miss—while the theory suggests yes, reality tells a different story. The yuan's firmness hasn't noticeably reduced the volume of China's outbound shipments. Brad Setser, a senior fellow at the Council on Foreign Relations with years of experience observing China's economy, points out that China's export quantities have climbed by a total of 40% since late 2019, whereas imports have only ticked up by 1%.
ECONOMIES OF SCALE THAT DEFY EXPECTATIONS
The truth is, Chinese products remain attractively priced. When we look at the real effective exchange rate (REER)—a measure that accounts for inflation differences across countries—the yuan stands at its most undervalued point in 15 years, having dropped nearly 20% since early 2022 and almost 50% since 2012. To explain this simply, REER helps us understand how much a currency's buying power changes relative to other currencies after adjusting for price changes. It's like comparing apples to apples in different markets.
Factors such as a major housing market downturn, economic slowdown, outflows of capital, and uneven interest rate advantages have sped up this depreciation, and most observers concur that the yuan is significantly undervalued. This underpricing keeps Chinese goods competitive, even as the currency nominally rises.
Moreover, China can weather modest currency gains thanks to its vast presence, deep knowledge, and leading role in global supply networks across sectors like electric vehicles, solar panels, and batteries. No longer just a hub for inexpensive everyday items, China now operates at the premium end of the value chain, blending economic, technological, and strategic strengths.
"China's immense size is truly intimidating," remarks Marc Chandler, managing director at Bannockburn Capital Markets, who's spent decades analyzing China's economic maneuvers.
Given China's extensive influence in cutting-edge industries, how responsive are its exports to currency shifts? Surprisingly, not much. Take the example of Germany's Volkswagen, which has poured billions into its facility in Hefei, China. The automaker recently announced that a new electric vehicle model produced there can be up to 50% cheaper than similar ones made elsewhere. It would require another 5-10% jump in the yuan's value to seriously erode that competitive edge.
WEAKER CURRENCIES AND TRADE CONNECTIONS THAT MATTER MORE
Of course, exchange rates aren't the only—or even the primary—factor shaping a country's trade balance. Elements like internal market demand, worldwide economic expansion, shifts in raw material costs, and government policies on trade all weigh in heavily. And let's not forget the role of tariffs and other protective measures in today's climate.
Consider Switzerland: Its franc sits near its peak strength in 15 years when measured on a REER basis. Despite this, Switzerland enjoys a healthy trade surplus, surpassing 10% of GDP for each of the last three years. On the opposite end, Japan has seen its yen weaken over time, currently at its all-time low in REER terms, and yet it has maintained a trade surplus for the past five years straight.
These examples illustrate that trade isn't a straightforward game ruled solely by currency values—it's influenced by a web of broader economic forces.
It appears Beijing will persist with its approach of carefully controlling the yuan's appreciation, which could marginally ease brewing trade disputes with Washington and quiet accusations from Asian rivals that China is aggressively expanding into their territories.
However, here's a controversial take: In the end, "aggressive expansion" is precisely the goal for China—and a stronger yuan isn't likely to hinder it. Some might argue this is smart economic strategy, while others see it as unfair manipulation that tilts the global playing field. What do you think? Does China's managed currency policy promote fair competition, or does it give them an undue advantage? Is this approach sustainable in the long run, or a recipe for backlash? Share your thoughts in the comments below—we'd love to hear your perspectives!
(The opinions expressed here are those of the author, a columnist for Reuters)
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By Jamie McGeever; Editing by Toby Chopra
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Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.
Jamie McGeever has been a financial journalist since 1998, covering stories from Brazil, Spain, New York, London, and now back in the US. His expertise spans global markets, economics, policy, and investment. Jamie's career has included roles as a reporter, editor, and columnist across print and television, with extensive coverage of major events and key policymakers worldwide.
