Behind the PBOC's No-Target Stance on the RMB: Trade Structure and Industrial Competitiveness

Recently, the People's Bank of China published its policy stance on the RMB exchange rate, making clear that it does not preset a target level for the exchange rate and does not seek a trade competitive advantage through currency depreciation. The statement is both a direct response to accusations by some countries that China "depresses the exchange rate to boost exports" and an authoritative exposition of the profound changes now under way in China's trade structure.

Industrial upgrading reshapes the competitive foundation

The long-running controversy over the RMB exchange rate is, in essence, the externalisation of the competitive demands of different countries in international trade. Industrial hollowing-out in the United States and the relative decline of Europe's technology sector have made cross-border goods priced in RMB increasingly competitive. To counter that competition and protect domestic industry, questioning whether the RMB "depresses the exchange rate to boost exports" has become a form of political correctness.

Traditional exchange rate theory emphasises the advantage of depreciation because it rests on an important implicit premise: export goods are highly homogeneous and price competition is the main form of competition. Under that framework, driving down the exchange rate to achieve a relatively low price for traded goods can indeed be "profitable". But changes in the structure of China's export trade are undermining that theoretical foundation.

According to the General Administration of Customs, in the first four months of 2026 China's exports of mechanical and electrical products rose 17.6% year on year and accounted for 63.5% of total exports. Exports of electric vehicles, lithium batteries and wind turbine generator sets grew 68.1%, 43.2% and 40.7% respectively. In the first half of 2026, export delivery value in the equipment manufacturing industry rose 18.2% year on year, contributing nearly 50% of industrial export growth. In sharp contrast, exports of traditional labour-intensive products such as garments, luggage and toys came under broad pressure. China's exports are shifting from labour-intensive goods to products that are technology-intensive, high value-added and deeply embedded in supply chains.

International lessons: Japan's "forced upgrade" and Germany's "active anchoring"

History shows that industrial upgrading under exchange rate appreciation pressure is not a challenge unique to China. After the Plaza Accord in 1985, the yen appreciated by more than 50% against the dollar in less than three years, and the profit margin on Japan's manufacturing exports fell sharply in fiscal 1986 — recurring earnings from manufacturing exports dropped 42.9% year on year, with the electrical machinery and automobile industries down 48.5% and 38.6% respectively. Yet it was precisely that "appreciation squeeze" that forced Japanese companies to transform their business models systematically. Panasonic moved from videotape recorders to products such as hard drives, with a cost pass-through rate of more than 50%. Toyota and Honda accelerated overseas investment, shifting from "trade-led growth" to "investment-led growth". In 1986 Japan's trade surplus jumped to US$101.6 billion, up 65% from a year earlier. Rather than destroying Japanese exports, yen appreciation helped consolidate the country's position as an economic power.

Germany's experience is even more instructive. Between 1973 and 1995 the Deutsche Mark appreciated 126% against the dollar cumulatively, yet over the same period Germany's total exports expanded from DM148.9 billion to DM732.2 billion and its trade surplus widened from DM20.7 billion to DM91.1 billion. Germany achieved both currency internationalisation and stronger export competitiveness against a backdrop of persistent mark appreciation: it offset the impact through high-end manufacturing upgrading, stabilised regional trade through the European currency linkage mechanism (keeping exchange rate fluctuations within 2.25%), and maintained monetary policy independence. Volkswagen's decision during the 1970s mark appreciation to discontinue the Beetle and launch the Golf at a 30% premium — absorbing exchange rate pressure through product innovation — is a classic case of "premiumisation as currency hedging".

Trade data show that Chinese manufacturing is moving from traditional price competition to competition on technology, and from simple manual production to an all-round industrial upgrade towards smart manufacturing. RMB appreciation will indeed compress margins on some low-end products, but it can hardly shake the order base of high-technology products. In the era of low-end contract manufacturing, a low exchange rate could reflect cost advantages. In the era of smart manufacturing, a high exchange rate reflects the overall market competitiveness of Chinese products. Appreciation is not weakening all exports; it is accelerating the elimination of backward capacity that survives only on exchange rate differentials while highlighting the market resilience of high-end manufacturing.

The exchange rate debate is a debate about development paths

Classic exchange rate theory tells us that currency appreciation makes export goods more expensive and less competitive. But that applies only to perfectly competitive markets with homogeneous goods. As noted above, exchange rate competition is at bottom competition between national industrial structures. In today's international economy, the exchange rate has long outgrown its role as a simple goods-trade instrument to become a composite product of financial asset pricing, capital flow expectations and geopolitical games.

More noteworthy is that the international trading system has never been a neutral arena. After the Second World War, the United States used its overwhelming economic and financial advantages to shape the Bretton Woods system and the global economic governance architecture that evolved from it, creating a dollar-dominated institutional power in trade. That institutional power controls rule-making, financial infrastructure, long-arm jurisdiction and the ability to shift crises onto others. Through infrastructure such as the SWIFT messaging system and the New York Clearing House interbank payments system, the dollar deeply influences global capital flows and clearing channels; the United States holds significant decision-making influence in the IMF and the World Bank, and international credit rating agencies have long been dominated by the United States and its allies.

The debate over whether the RMB should rise or fall must be viewed within that power structure. As US manufacturing has hollowed out and Europe's technology industry has declined in relative terms, the market competition once dominated by traditional industrial countries in Europe and the United States has been hit by "Made in China". The frequent accusations by the US and Europe of a Chinese "low exchange rate policy" are in essence an attempt to use financial market hegemony to endorse domestic industrial protection — a form of pre-emptive trade deterrence adopted by the countries concerned after losing ground in international trade competition. The fundamental determinants of a country's export competitiveness are industrial structure, technological level and institutional efficiency, not the exchange rate itself. Attributing insufficient industrial competitiveness to the RMB exchange rate is logically untenable.

(The author is a financial commentator. Source: International Finance News)