RMB Undervalued by 20%-30%, Structural Economic Constraints Limit Appreciation Potential
Taylor Wilson
Former senior U.S. Treasury official Mark Sobel estimates the yuan is 20%-30% undervalued under the IMF's exchange-rate framework — driven not by manipulation but by China's high savings, weak consumption, and export dependence, which means Beijing is unlikely to push a major revaluation.
Where does the "20%-30% undervalued" number come from?
Sobel uses the IMF's exchange-rate assessment framework — a model that benchmarks a currency's "fair value" against current-account balances, capital flows, and other macro indicators.
His core point: the undervaluation is not the direct result of policy manipulation. It is embedded in China's economic structure.
This means → getting the yuan back to "fair value" cannot be done by adjusting the exchange rate alone — the economic model itself has to change.
What exactly is stuck in the economic structure?
China's savings rate is extremely high, fed by two channels: state banks funnel capital to SOEs and priority sectors like AI, semiconductors, and EVs; meanwhile, households save aggressively because the social safety net is thin.
High savings + weak consumption → money that isn't spent at home flows out as exports → a persistent current-account surplus.
Sobel estimates China's manufacturing export surplus now exceeds 10% of GDP — the core engine behind what observers call "China Shock 2.0."
The yuan has strengthened this year — so why still "undervalued"?
The nominal exchange rate has indeed risen, but Sobel warns: nominal rates are misleading.
The key mechanism: U.S. inflation runs around 3%, China's is near zero → even if the nominal rate stays flat, China gains roughly 3% in competitiveness every year.
In plain terms = Chinese goods don't get more expensive while American goods do — this "invisible depreciation" matters more than the headline exchange rate.
On an inflation-adjusted real basis, the yuan has still depreciated about 15% since 2022.
What is driving the nominal appreciation this year?
Three forces at work: persistent current-account surpluses, a weaker dollar driven by Trump-administration rhetoric, and exporters converting dollar earnings en masse once they sensed Beijing would tolerate appreciation.
Exporter behavior is classic herding: they hoard dollars when the yuan falls and rush to sell dollars when it rises — the direction can flip at any time.
Whether Chinese state banks are managing the pace of appreciation behind the scenes remains an open question.
How does Xi Jinping's "face factor" shape central-bank decisions?
The report cites journalist observations: Xi has a clear aversion to a weak yuan, treating it as a matter of national image rather than a pure economic tool.
This reflects a reality where exchange-rate policy in China carries political weight, not just economic logic.
That put the PBOC in a bind last year: letting the yuan weaken would cushion exporters against tariffs, but it clashed with the top leader's preference. The pressure eased only after U.S.-China trade tensions cooled.
Looking ahead — will the yuan appreciate significantly?
Sobel's forecast: no. Beijing will stick to its long-standing playbook — "slow, cautious, incremental appreciation," with stability as the overriding priority.
Because the starting valuation is low, Beijing has plenty of room to let the yuan rise without hurting competitiveness — and the move doubles as a buffer against U.S. and EU pressure on Chinese exports.
But Sobel stresses: Beijing has shown no willingness to fix the root problem — the growth model built on excess savings, state-directed investment, and export dependence. As long as that model stays, the potential dividend of yuan appreciation for household consumption remains unrealized.
Content is for reference only, not financial advice.