Yuan’s Undervaluation Persists Amidst China’s Economic Realities
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Yuan's Undervaluation Persists Amidst China's Economic Realities
- The Chinese yuan is estimated to be undervalued by approximately 20% to 35% against the U.S. dollar, despite China's leadership favoring a stronger currency.
- This undervaluation is a systemic characteristic of China's economic model, as highlighted by former U.S. Treasury official Mark Sobel in August 2026.
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Chinese leader Xi Jinping has expressed a desire for a strong yuan, viewing a weak currency as a “loss of face” and a sign of weakness. He has also articulated ambitions for the yuan to become a major global reserve currency, challenging the dominance of the U.S. dollar, a goal he outlined in a 2024 speech published in January 2026.
However, China’s economic structure continues to contribute to the yuan’s undervaluation. Experts like Mark Sobel note that the yuan’s persistent cheapness is deeply embedded in the country’s economic model. In August 2026, former U.S. Treasury official Brad Setser indicated the renminbi is 30-35% undervalued. Goldman Sachs estimated in December 2025 that the yuan was about 25% undervalued and projected a gradual appreciation through 2026. The International Monetary Fund (IMF) also estimated in May 2026 that China’s real effective exchange rate was undervalued by 12-21% in the previous year.
China’s exchange rate policy is managed by the People’s Bank of China (PBOC), which sets a daily reference rate for the yuan-dollar exchange rate, allowing fluctuations within a ±2% band. This managed exchange rate and capital controls are seen as limiting the yuan’s broader international use. Despite these controls, the yuan has seen moderate appreciation in 2026, strengthening 3% against the dollar and 2.5% against the euro by May 2026. This appreciation has been supported by a weaker dollar and China’s robust export earnings, contributing to a large current account surplus.
The debate surrounding the yuan’s value highlights a paradox: while Beijing desires a stronger currency, the underlying economic model, which prioritizes export-led growth, inherently contributes to its undervaluation. Some economists argue that a stronger yuan would benefit China by encouraging domestic consumption and reducing trade imbalances. However, others suggest that currency appreciation could worsen deflationary pressures and further reduce demand for foreign goods.