Why China’s yuan matters to global trade imbalance

China’s yuan should be viewed as an active part of the global economic imbalances rather than merely a consequence of domestic savings and investment patterns, according to Indian economist Anantha Nageswaran and P.S. Srinivas.

Writing in response to a recent Economist essay by Gita Gopinath, Pierre-Olivier Gourinchas and Hélène Rey, the authors argue that while exchange rates reflect domestic economic fundamentals over the long term, China’s currency regime also contributes directly to the country’s persistent trade surplus.

They point to China’s record $1.2 trillion goods-trade surplus in 2025, which increased by about a fifth despite a sharp decline in exports to the United States. Increased shipments to other markets more than offset the fall, highlighting the growing global impact of China’s export strength.

The authors argue that an undervalued yuan keeps Chinese goods competitive abroad and can encourage other countries to restrain their own currencies, effectively exporting China’s adjustment problem. They describe China’s growing impact on global markets as an export of deflation.

They also question whether domestic reforms alone can correct the imbalance. Household consumption accounted for about 40% of China’s GDP in 2024, broadly unchanged from two decades earlier despite repeated government commitments to rebalance growth towards consumption.

The authors acknowledge that a sudden appreciation of the yuan would not solve China’s economic problems and could increase deflationary pressure. However, they argue that sustained appreciation, combined with financial liberalisation and domestic reforms, could help reduce excess capacity, lower the cost of imported energy and commodities and ease trade tensions.

They also stress that the United States must address its own fiscal deficit, arguing that both countries contribute to pressures faced by developing economies. China’s excess industrial capacity can undermine manufacturers abroad, while US deficits attract global investment.

A stronger yuan combined with US fiscal adjustment could therefore help rebalance global demand and reduce pressure for protectionist trade policies, the authors argue.

Ultimately, they say, only China can engineer a sustained appreciation of its currency. The central challenge is political: boosting domestic demand may require Beijing to give up some control, while an export-led, supply-side strategy allows the state to retain greater influence.

The question of what could persuade China to shift towards a more balanced growth model therefore remains unresolved.

By Aghakazim Guliyev