RMB Alleged to Be Undervalued by 20%, EU Pressures for Appreciation
Taylor Wilson
Multiple international institutions estimate the renminbi's real exchange rate is 10%–20% undervalued; the EU is pressing China to let it rise and narrow a trade deficit averaging roughly $1.1 billion a day, with both sides setting October as the negotiation deadline.
How undervalued is the renminbi, really?
The IMF estimates China's real effective exchange rate was 12%–20% undervalued in 2025; former U.S. Treasury official Brad Setser argues the gap may exceed 20%.
Strategists at Deutsche Bank, Goldman Sachs, and Bank of America each use different models, placing undervaluation at 10%–20%.
ANZ takes the opposite view, seeing limited evidence of nominal undervaluation. This means → there is no consensus on the undervaluation itself — the dispute is over which yardstick to use.
It appreciated 9% nominally — why is the EU still unsatisfied?
Over the past 12 months the renminbi rose roughly 9% against the euro in nominal terms, yet European policymakers still consider its real value too low.
In plain terms = the nominal rate is the "sticker price"; the real effective exchange rate — adjusted for inflation and purchasing power — is what reveals true competitiveness, and that gauge still reads weak.
The EU is therefore calling for a further 20%–30% appreciation to level the playing field.
How large has the trade deficit grown?
In June 2026 the EU's trade deficit with China averaged about $1.1 billion a day; China's surplus with the EU hit $32.9 billion that month, a record.
Germany carries the EU's largest bilateral deficit — roughly €95 billion last year — and its automakers are feeling Chinese competition most acutely.
This reflects a political, not just economic, pressure point: the deficit numbers have grown too large for EU domestic politics to absorb quietly.
How does the PBOC manage the exchange rate?
China operates a "managed float": the central bank sets a daily midpoint and allows the renminbi to trade within a ±2% band around it.
Its toolkit includes adjusting banks' foreign-exchange reserve-requirement ratios and directing state-owned banks to buy or sell dollars on the open market. In plain terms = the PBOC sets the anchor and can step in to pull the rope at any time.
The PBOC intervened to prop up the currency during sharp sell-offs in 2022–2023, then gradually withdrew some support after the renminbi strengthened in early 2026. Critics say these opaque operations keep the currency artificially weak; the PBOC denies this, insisting the rate is ultimately market-determined.
How do Chinese economists push back?
Chinese economists broadly reject the "undervalued" label, arguing that prevailing valuation models overweight the trade surplus and underweight capital flows and other market factors.
This means → the two sides cannot even agree on how to calculate a fair exchange rate — the starting point of the negotiation is the disagreement itself.
What does the October deadline signal?
With the domestic economy still soft, Beijing has little incentive to engineer a large appreciation.
Both sides have set October as the deadline for progress on trade disputes.
This reflects the EU's core dilemma: China is simultaneously a strategic rival and an indispensable trading partner. Whether any consensus on the renminbi can form before October will be a key test of where the China–EU relationship is heading.
Content is for reference only, not financial advice.