The Renminbi is once again at the center of discussions about global macroeconomic imbalances. With China’s trade surplus reaching $1.2 trillion in 2025 and its manufacturing sector gaining dominance, many financial and economic commentators agree that the Renminbi is significantly undervalued.
They suggest China should allow its currency to appreciate sharply, which would reduce its surplus, ease competitive pressure on manufacturers in other countries, and help rebalance the global economy. This argument is politically convenient as it offers a seemingly easy solution.
The Real Estate Factor
However, this argument has a critical flaw. Before assuming that a currency appreciation is the right move for China, it’s essential to understand the root cause of the Renminbi’s weakness. If it’s primarily due to deliberate interventions to boost exports, then a rapid appreciation could be an effective solution.
Renminbi Weakness Rooted in Domestic Demand
But if the weakness stems from weak domestic demand, allowing the currency to appreciate without addressing this issue would be counterproductive. China’s situation falls into the latter category. The Renminbi’s weakness and the growing surplus are better understood as consequences of a significant adjustment in the real-estate sector.
Historically, property has been a major driver of Chinese demand, credit creation, local government finance, household wealth, and investment. When the property market struggles, domestic demand, particularly investment demand, suffers. When investment declines faster than national saving, the external surplus increases.
This pattern isn’t unique to China. CF40 Research has identified a clear trend where housing market downturns have improved economies’ external balances, as seen previously in the United States and Japan, where weak domestic demand also led to persistently low inflation.
The Global Impact
While the Renminbi’s nominal exchange rate has remained stable against the US dollar and other currencies in recent years, high global inflation and low domestic inflation have led to a significant real depreciation. The weak currency hasn’t undermined domestic demand and resulted in large external surpluses; rather, it’s the other way around.
The Renminbi’s exchange rate matters, but how it adjusts is even more important. An appreciation driven by economic recovery would be positive. If the property sector stabilizes, household confidence improves, productive investment increases, and imports grow, the currency would strengthen as part of a broader rebalancing.
A sudden appreciation, however, wouldn’t fix China’s property market or revive domestic demand. Instead, it would harm the export sector and the investment and consumption it supports. The impact on global imbalances would be uncertain, but it would likely slow China’s recovery, potentially leading to weaker growth for a world economy that would remain unbalanced.
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Global Impact of China’s Economic Adjustments
The rest of the world has a significant interest in how China manages this adjustment. China has become a price anchor for a large portion of global manufacturing, as producer prices increasingly influence goods prices elsewhere, even when the final product isn’t directly imported from China.
Weak Chinese demand and a low Renminbi exchange rate have helped keep goods inflation in check in advanced economies, although this benefit is often overlooked compared to the competitive pressure China places on foreign producers. The post-COVID disinflation in advanced economies is a prime example.
It wasn’t only due to tighter monetary policies and repaired supply chains but also because of low prices for Chinese manufactured goods. China should focus on rebalancing by strengthening domestic demand. This involves stabilizing the property sector, improving household income expectations, expanding social insurance, and redirecting investment towards more productive uses.
A sharp currency appreciation would have the opposite effect, increasing the price of Chinese exports. This would feel more like a cost-push shock than a painless rebalancing. Such an adjustment wouldn’t encourage factory construction in Europe, higher productivity in the US, or improvements in China’s property market.
It would simply raise global prices for manufactured goods at a time when inflation in many advanced economies is already high. Some foreign producers might appreciate the reduced competition from China.
Bond Markets and Global Savings Trends
Bond markets would feel the effects. Expectations of higher inflation and tighter monetary policy would put pressure on nominal yields, especially as advanced economies are already drawing down global savings. With the US running large fiscal deficits, Europe increasing spending on defense and infrastructure, and AI investments requiring substantial capital, the demand for savings from the rest of the world has increased.
In this context, it’s important to remember that China’s surplus is the counterpart of Chinese net savings supplied to the rest of the world. If China absorbs more domestically, less Chinese savings will be available to finance deficits abroad. This could lead to a healthy adjustment if deficit countries save more and borrow less.
Rebalancing Requires Domestic Demand Boost
However, if they fail to do so, bond yields, which have already reached multi-year highs, will likely continue to rise. This doesn’t mean China should artificially suppress its currency. Instead, it should aim to rebalance by boosting domestic demand.
Deficit countries also have a role to play. They cannot demand smaller Chinese surpluses while continuing to rely on cheap imports, disinflationary pressure, and abundant foreign savings. If advanced economies want China to absorb more of its production, they must demonstrate greater fiscal discipline.
