China's Cheap Yuan Distorts Global Trade, Not Just a Domestic Issue

The cheap yuan is once again at the centre of debate. The currency’s persistent weakness is often cited as a key reason why Chinese goods remain highly competitive and the country’s trade surplus continues to swell. However, some argue the undervalued yuan is not merely a consequence of China’s high savings and low consumption, but an active policy tool that sustains its dependence on production and exports. While high household and corporate savings relative to investment do play a role, the government’s influence over the exchange rate through central bank intervention, capital controls, and the financial system means the yuan does not move freely according to market forces.

China’s trade surplus reached a record US$1.19 trillion in 2025, up 19.8% from the previous year, driven by a surge in exports to US$3.77 trillion while imports stagnated. This surplus has more than doubled since 2020, even as exports to the United States declined sharply, with producers finding alternative markets. The competitive yuan allows Chinese manufacturers to keep prices low, putting pressure on other nations, particularly developing countries building their own manufacturing sectors, to suppress their currencies or face losing market share. China is now exporting not just goods, but also deflationary pressure, as its export prices rise more slowly than those of its trading partners.

Reducing this export dependency by boosting domestic consumption has proven difficult. Household consumption as a share of GDP has remained around 40% for two decades, largely because limited social safety nets force families to save for healthcare, education, and retirement. While a stronger yuan could lower import costs for commodities and consumer goods and ease trade friction, a rapid appreciation risks making Chinese products unaffordable internationally and creating idle production capacity. The IMF estimated the yuan was undervalued by 21.3% in 2026, suggesting a gradual strengthening alongside reforms to social security and household incomes is necessary.