China Defends Yuan Policy With Imbalances in Focus at EU Talks

(Bloomberg) — China’s central bank rejected claims that the yuan is undervalued as trade talks proceed with the European Union, where officials have increasingly blamed trade imbalances on the exchange rate.

The People’s Bank of China issued a lengthy formal document on its policy position on Thursday along with an English translation, defending its management of the yuan. It argued that exchange-rate adjustments won’t resolve structural imbalances in the global economy and said China’s export strength stems from rising industrial competitiveness rather than currency policy.

“China has no need or intent to gain competitive advantages through currency devaluation,” it said. The offshore yuan was little changed at around 6.7 per dollar on Friday. It’s appreciated 4.3% this year, touching its strongest level since 2022 last month.

The publication will do little to ease concerns in Europe as the bloc’s Trade Commissioner Maros Sefcovic continues his two-day trade negotiations with Chinese Commerce Minister Wang Wentao. While the PBOC’s document made no direct reference to the talks, exchange-rate policy has become increasingly contentious in Europe, where officials say a weak yuan gives Chinese exporters an unfair advantage and contributes to the bloc’s widening trade deficit with China.

“The strong pushback against a change of exchange rate policy right ahead of the EU trade negotiations suggests a firmer stance towards the EU than the US, in our view, and that exchange rate policy is non-negotiable with the EU,” said Becky Liu, head of Greater China macro strategy at Standard Chartered Bank.

The debate comes against a backdrop of a significant shift in currency markets, where the yuan has strengthened against most major currencies this year. The euro, pressured by weak European growth and France’s fiscal problems, has fallen more than 10% against the yuan from its January peak.

German Chancellor Friedrich Merz has been among the most outspoken voices in airing accusations that China is keeping the yuan artificially weak, saying it’s undervalued by 25% to 30%. European Central Bank President Christine Lagarde has backed the idea that any Group of Seven talks on currency valuations need to include China.

At the same time, Lagarde has questioned if it’s appropriate to use an approach similar to the 1985 Plaza Accord, when finance ministers and central bankers from the US, Japan, West Germany, France and the UK met in the iconic New York hotel to coordinate policies to engineer a weaker dollar.

The International Monetary Fund’s external sector report in July called China and the US “the main drivers” behind an increase in “excess current account balances.” Next week, global policymakers will gather for the annual IMF-World Bank meetings in Bangkok. PBOC Governor Pan Gongsheng is due to speak at a Deutsche Bank event there on Thursday, according to a schedule seen by Bloomberg.

“This is a pre-negotiation positioning document, not a change in exchange-rate regime,” said Tommy Xie, head of Asia macro research at Oversea-Chinese Banking Corp. “By setting out its arguments ahead of a crowded international policy calendar, Beijing is seeking to shift the debate away from currency undervaluation towards the structural drivers of global imbalances.”

The PBOC paper laid out a broad defense of China’s exchange-rate regime, arguing there’s no universally accepted methodology for determining an equilibrium currency value and said current-account surpluses don’t automatically imply undervaluation.

Reducing global imbalances requires action by both surplus and deficit countries, the central bank said. It blamed declining competitiveness in some economies on high costs, inadequate infrastructure and under-investment, while reiterating China’s commitment to expand domestic demand and boost consumption.

Officials reiterated they neither target a specific level for the yuan nor seek to determine its longer-term trajectory. The central bank also argued that trade has become less sensitive to currency movements as companies upgraded their products and increased hedging.

The PBOC pointed to several countries including Japan, Switzerland and Germany as examples of surplus economies that have seen their currencies depreciate.

“Attributing one’s decline in industrial competitiveness, weakened fiscal discipline, and complicated structural issues simply to others’ exchange rates is nothing but shifting the responsibility for adjustment onto others and dodging accountability,” it said.

Khoon Goh, head of Asia research at Australia & New Zealand Banking Group, called the document “the longest statement explaining the PBOC stance on the yuan since the exchange rate reform” more than a decade ago.

But the remarks were also notable for what they left unsaid. Neither the daily fixing nor the role of state-owned banks were featured in the document, despite their prominence in offshore discussions of China’s exchange-rate management.

The central bank also said China will begin reporting its foreign-exchange operation data to the IMF in 2027 as part of efforts to improve transparency. It didn’t specify whether the information would be made public or provide details on the scope of the reporting.

“The timing of releasing this renminbi view statement by the PBOC may have been carefully chosen, as Brussels has been the most vocal critique of Beijing’s FX policy over the past year,” Nomura Holdings Inc. economist Ting Lu said in note, using the official name for the Chinese currency. “It argues that global imbalances require joint action by surplus and deficit economies, and that deficit countries should undertake fiscal consolidation.”

While the yuan has been appreciating on a nominal basis, Bank of New York Mellon strategist Geoffrey Yu said the more relevant issue may be whether China allows the yuan to strengthen in real or inflation-adjusted terms through reflationary growth and rising price differentials relative to other economies. Beijing’s recent stimulus measures suggest policymakers are moving in that direction, he added.

China’s real effective exchange rate — which is measured against a basket of partners’ currencies and adjusted for inflation — was 12% to 20% undervalued in 2025, the IMF has estimated.

The PBOC challenged that assessment. Treating those findings as “official evidence” of undervaluation amounts to “a misinterpretation and misuse,” it said.

Francesco Pesole, a currency strategist at ING Bank NV, doesn’t expect a major shift in China’s currency policy, given policymakers’ desire to balance exchange-rate stability against excessive appreciation that risks hurting exports.

The statement may signal that “the central bank wants to start preparing markets and trading partners for a greater willingness to lean against further yuan strength,” Pesole said.

–With assistance from Li Liu, Wenjin Lv, Fran Wang and Jorgelina do Rosario.

(Updates with PBOC governor’s scheduled appearance next week in ninth paragraph.)

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