Is the RMB Undervalued? The PBOC's Latest Policy Stance Provides the Answer

The People's Bank of China (PBOC) recently released its policy stance on the RMB exchange rate, drawing widespread market attention.

Since 2025 the RMB has appreciated about 9% cumulatively against the US dollar. Against this backdrop, the central bank's statement left the market puzzled: with the currency clearly strengthening, why respond so prominently to "undervaluation" doubts at this moment?

The answer lies abroad. For some time, some Western economies have attributed China's trade strength to an undervalued RMB and argued the yuan should appreciate substantially. In the market's view, the PBOC's decision to publish its policy stance now is both a direct response to external pressure and an effort to build an accurate, complete narrative and position on the RMB exchange rate.

Synthesizing the views of a number of authoritative market experts, the official text sends an unequivocal signal: the RMB exchange rate is determined by market supply and demand; China does not preset an exchange rate target level, does not intervene in long-term trends, and has no intention of gaining a competitive advantage through currency depreciation.

Experts also believe the RMB can hardly be called undervalued at present, that the trade surplus and the exchange rate have no causal relationship, and that the root of global imbalances lies in deficit countries themselves and in the inherent contradictions of the international monetary system, requiring all countries to jointly advance structural reforms.

Is the RMB Undervalued? Market Supply and Demand Decide

Is the RMB exchange rate undervalued, or has it been intervened? For some time, the West has questioned whether the RMB exchange rate is sufficiently market-based and transparent, attributing depreciation, or appreciation that is too slow, to central bank intervention.

How exactly is the RMB exchange rate formed? The PBOC gave a clear response: China operates a managed floating exchange rate system based on market supply and demand and adjusted with reference to a basket of currencies, and insists on letting the market play a decisive role in exchange rate formation. The central bank sets no exchange rate target level, does not intervene in the long-term trend of the exchange rate, and has exited from routine foreign exchange intervention since 2017.

The central bank's bottom line is to prevent sharp short-term depreciation from affecting financial stability. During major external shocks such as the sudden pandemic and the April 2025 tariff war, it uses macroprudential tools to guide expectations and, in extreme scenarios, intervenes directly, correcting "herd behavior" and the self-reinforcing spiral of irrational depreciation expectations.

Such practices conform to international rules and practice and are not unique to China. In July 2026 the yen at one point fell to a near 40-year low against the US dollar, likewise prompting joint intervention by the countries concerned.

So is the RMB exchange rate undervalued? "It is hard to call it clearly misaligned," said Guan Tao, chief economist at Huafu Securities. Whether an exchange rate is overvalued or undervalued refers to the deviation of the market rate from the equilibrium rate, and the equilibrium rate is the level corresponding to a state in which the economy achieves internal and external equilibrium simultaneously. The RMB now faces a conflict between internal and external equilibrium: from the perspective of the external sector's trade surplus and excess foreign exchange supply, it is positive for the RMB, but from the perspective of the domestic sector's strong supply and weak demand and negative interest rate differentials at home and abroad, it is negative for the RMB.

In July 2026 the International Monetary Fund (IMF) released its 2026 External Sector Report, assessing China's external position in 2025 as "stronger than warranted," with the report putting the median RMB real effective exchange rate gap at -21.3%. Individual views wrongly cited the IMF's external balance assessment for the RMB's nominal exchange rate, using it as an "official basis" for exchange rate accusations.

In fact, the IMF assessed the RMB's real effective exchange rate level using three methods, with hugely divergent, even opposite, results.

"The IMF's assessment results should therefore be used prudently," Guan Tao said, noting that the IMF's policy recommendations for China mainly concern structural adjustment policies such as actively expanding domestic demand, rather than pushing for RMB appreciation.

Wen Bin, chief economist at China Minsheng Bank, believes that after years of development China has gradually formed a well-functioning, multi-layered foreign exchange market system in which market supply and demand play a decisive role in RMB exchange rate formation. Since 2026, with the dollar index and US Treasury yields rising relatively fast and non-US currencies depreciating broadly, the RMB has still generally maintained an appreciation trend against the US dollar. The RMB's steady performance is itself strong evidence of the effectiveness of China's exchange rate regime.

Is the Trade Surplus a Credit to the Exchange Rate? There Is No Significant Causal Link

Discussion of China's surplus has been heating up for some time. In the eyes of some Western economies, this is interpreted as the "credit" of an undervalued RMB. To this, market experts give the opposite answer: there is no significant causal relationship between the trade surplus and the exchange rate; both are jointly affected by economic transformation.

"The rise in China's trade surplus in recent years should not be attributed to changes in the RMB exchange rate," said Zhang Wenlang, chief macro analyst at the research department of CICC.

Generally speaking, an upswing in the financial cycle suppresses the current account but pushes up the domestic currency exchange rate, while a downswing in the financial cycle pushes up the current account and holds back the domestic currency.

Zhang said that in recent years one manifestation of China's economic transformation has been precisely the topping-out and reversal of the financial cycle: property market adjustment, private sector deleveraging, rising savings and slower imports; social resources shifting from real estate to more efficient sectors such as manufacturing, raising production efficiency, supporting exports and accelerating the rise of domestic goods (slower imports); and the property adjustment lowering the prices of non-tradables represented by housing prices - that is, a decline in the internal real exchange rate (the price of non-tradables relative to tradables) - reducing intermediate input costs for tradables and boosting exports.

And in the downswing of the financial cycle, falling housing prices dragged down related sectors of the stock market, weakening the incentive to allocate funds to domestic assets and thus making the nominal exchange rate relatively weak.

Zhang believes that under such circumstances, although China's trade surplus rose in previous years, exporters' incentive to convert foreign exchange was once weak, providing no corresponding support to the domestic currency; at the same time, the property adjustment and weak domestic demand and prices also made the real exchange rate relatively weak.

It can therefore be seen that the surplus and the exchange rate are not mutually causal. In fact, since the 2005 exchange rate reform the RMB has floated in both directions with alternating appreciation and depreciation cycles and an evident two-way floating feature. Yet past multiple rounds of RMB appreciation did not hold back China's trade development, nor did China's export share rise faster during depreciation periods.

Appreciation and depreciation do not correspond to changes in export share. The RMB appreciated 21% against the US dollar in 2005-2008, 10% in 2010-2014 and 9% in 2020-2021, while China's share of global exports rose 2.4, 2.8 and 1.7 percentage points respectively in those periods. In 2016 the RMB depreciated 7% against the US dollar and in 2022 by more than 8%, while China's share of global exports fell 0.7 percentage points in both periods.

Wen Bin believes China's trade growth mainly benefits from its super-large market, complete industrial chains and infrastructure systems, abundant high-quality and hard-working labor resources, and sustained R&D and innovation capacity. China has never promoted exports by pushing the RMB lower; even when some countries launched trade wars and the Federal Reserve raised rates sharply, the PBOC duly adopted macroprudential measures to prevent the RMB from overshooting to the depreciation side.

Since 2025 the RMB exchange rate has floated in both directions and appreciated in an orderly manner, gaining about 9% cumulatively against the US dollar and recently reaching around 6.70:1.

In Guan Tao's view, this rebound is precisely the result of China's strong exports and trade surplus boosting the fundamentals of foreign exchange supply and demand, together with the confidence and sentiment boost from an economy developing toward new and better quality - a concrete manifestation of insisting on the decisive role of the market in exchange rate formation.

"In the first eight months of this year, China's export price index averaged 105.32, meaning export prices rose about 5% year on year on average," Guan said, noting this reflects a rising price contribution to export growth, or stronger non-price competitiveness, further confirming that China's trade development is rooted in the improvement of industrial international competitiveness. China has no need and no intention to gain a trade competitive advantage through currency depreciation.

Who Is Responsible for Global Imbalances? The Solution Lies in Joint Reform by All Countries

As discussion of global imbalances heats up, some habitually point to China's surplus and the RMB exchange rate. Yet this simplistic attribution to "the exchange rate" does not hold.

How should global imbalances be resolved? The PBOC is clear: it is not the unilateral responsibility of surplus or deficit countries; all parties must respond together.

Guan Tao said bluntly that simply attributing the complex problems of the international monetary system and economic structure to the RMB exchange rate is scapegoating others and does not help solve the problem. Empirical studies show that China's foreign trade is insensitive to the exchange rate, and that the goods trade or current account surplus bears no linear relationship to the RMB exchange rate. The advisable path is for all countries to formulate medium- and long-term policy plans around structural reform and implement them firmly.

Wen Bin also said that simply attributing a country's declining industrial competitiveness, weakened fiscal and financial constraints and complex structural problems to other countries' exchange rates amounts to shirking and evading one's own adjustment responsibilities.

Where do the imbalances originate? On one hand, in deficit countries themselves. "Domestic policy problems in deficit countries cannot all be converted into exchange rate adjustment responsibilities for other countries. For example, in recent years the US trade deficit with China has fallen, but its overall trade deficit has not reversed, showing that the US trade deficit has a great deal to do with the US itself," Zhang Wenlang said.

On the other hand, it relates to the inherent contradictions of the international monetary system. In recent decades the world's major surplus countries have rotated constantly while the major deficit country has remained unchanged. Since the 1970s and 1980s the international division of labor has undergone repeated adjustment, with the concentration of current account surpluses shifting dynamically from Japan and Germany to South Korea, Taiwan (China), Hong Kong (China) and Singapore, and then to China and ASEAN; Germany and South Korea have manufacturing shares above the global average and have long maintained current account surpluses.

The PBOC believes that in an international monetary system dominated by a single sovereign currency, the issuer of the main reserve currency can sustain debt and fiscal expansion for a relatively long period, supporting high consumption and low savings and thereby generating a long-term trade deficit. This also weakens that country's fiscal and financial constraints and manufacturing competitiveness to some extent, increasing debt and balance of payments risks.

Zhang Wenlang argues that global rebalancing must squarely face the United States' own low savings and high fiscal deficit. At present its unemployment rate is at a historic low, yet its fiscal deficit remains high. Maintaining a high fiscal deficit while the economy grows at a certain pace will inevitably widen the trade deficit unless the private sector substantially raises savings or cuts investment. Without improving this savings-investment relationship, relying only on tariffs or on demanding that other countries' currencies appreciate will hardly eliminate the US overall external deficit.