America needs to put the renminbi back on the international agenda

{"text":[[{"start":9,"text":"Mark Sobel and Brad Setser are former Treasury officials who now work at OMFIF and the Council on Foreign Relations respectively. Robin Brooks is the IIF’s former chief economist and is now at the Brookings Institution. "}],[{"start":23.6,"text":"President Trump just returned from Beijing, where his economic focus was on “managing trade” — deals on Boeing planes, soyabeans, chips, and creating boards of trade and investment. But China’s massive current account surplus is primarily macroeconomic in nature, and a festering problem that a deal-obsessed president is ill-equipped to tackle. "}],[{"start":45.35,"text":"The surplus is officially reported at 3.7 per cent of GDP in 2025, but there’s reason to think it could be understated by a percentage of GDP, or even a bit more.  "}],[{"start":57.150000000000006,"text":"China’s manufacturing surplus is more than 10 per cent of GDP, and close to 1 per cent of world GDP — a much bigger surplus than any single country has run in the last 70-plus years. The size of that surplus (together with China’s continued reliance on net exports for its own growth) places major stress on the global economy, spawning growing protectionism. "}],[{"start":80.80000000000001,"text":"The US should call on what remains of its alliances and finally tackle the root causes of the problem. "}],[{"start":86.9,"text":"Yuans, whys and wherefores"}],[{"start":89.5,"text":"Unfortunately, there’s no simple or single explanation for why the renminbi is so persistently undervalued. "}],[{"start":96.55,"text":"China’s growth model clearly suppresses consumption, with high savings recycled into heavy manufacturing investment through a state-dominated financial system. The economy has been hit in recent years by low confidence and deflation due to housing market stress. Yet production has continued unabated despite weak domestic demand, with excess manufacturing output exported abroad."}],[{"start":119.6,"text":"And yes, it takes two to tango. The US current account deficit is also enormous, supported by the spending-happy American consumer, the AI capex boom and fiscal largesse. These factors boost import demand, often directly from China or transshipped via other centres. Unfortunately, America is doing nothing to curb its fiscal profligacy."}],[{"start":143,"text":"Yet the renminbi’s huge and persistent undervaluation is clearly a significant factor underpinning China’s massive current account surpluses."}],[{"start":151.6,"text":"In real terms the renminbi weakened substantially between early 2022 and mid-2025. While it has ticked up since then, it remains substantially undervalued."}],[{"start":null,"text":"

"}],[{"start":163,"text":"By how much? Well, If you apply China’s IMF current account norm to the country’s actual 2025 surplus then it produces an estimated renminbi undervaluation of roughly 20 per cent. "}],[{"start":176.05,"text":"Moreover, China’s inflation has been running lower than in the US or Europe, so even a modest currency appreciation implies no loss in competitiveness."}],[{"start":185.05,"text":"While China resisted depreciation when its currency was under pressure in 2023, the renminbi is now under pressure to appreciate more rapidly. Formal central bank reserves haven’t changed much, but both large purchases in the FX settlement series and the rise in the dollar assets of the state-owned commercial bank point towards backdoor intervention."}],[{"start":206.25,"text":"More walk, less talk"}],[{"start":208.45,"text":"The renminbi’s undervaluation is part and parcel of China’s growth model. An undervalued currency helps promote net exports and mitigate weak domestic demand. A strong currency would put money in Chinese citizens’ pockets, boost consumption and disincentivise export production. While China is now allowing some renminbi appreciation, it’s modest in real terms and insufficient to dent the massive accumulated undervaluation."}],[{"start":235.35,"text":"The US should therefore strongly encourage China to let its currency strengthen, even if this cannot on its own transform China’s growth model."}],[{"start":243.65,"text":"Yet the silence on this issue has been deafening lately. The Trump Administration has focused on tariffs and managed trade, while giving short shrift to the renminbi’s valuation. During the recent Trump-Xi summit, exchange rates were bizarrely not even mentioned."}],[{"start":258.8,"text":"The US Treasury has undoubtedly discussed the renminbi with Chinese authorities, but it has been muted in public. Its Foreign Exchange Reports have commendably flagged the opacity of Chinese financial data and possible spot and forward intervention, including through the activities of state-owned commercial banks. But they don’t go far enough in highlighting the currency’s undervaluation."}],[{"start":281.6,"text":"The latest report suggested Treasury might recommend use of existing US tariff authorities following a “manipulation” determination. But doing so in practice is very difficult. "}],[{"start":292.75,"text":"There’s no precise scientific measure of undervaluation, for example. How do you disentangle renminbi undervaluation from dollar overvaluation? How do you compute a bilateral equilibrium exchange rate? After all, currency values are determined by capital and not just trade flows, and US tariff authorities are best applied on specific goods or categories of goods rather than across-the-board. And, of course, China won’t necessarily sit idly by as an innocent bystander."}],[{"start":322.1,"text":"G7 Assemble! "}],[{"start":323.95000000000005,"text":"Europe should therefore join the US in protesting the renminbi’s undervaluation. "}],[{"start":329.40000000000003,"text":"When the US two decades ago urged Europe to join in arguing for renminbi appreciation, the continent balked, concerned about losing Chinese investment and trade opportunities. But the ground has now shifted."}],[{"start":342.00000000000006,"text":"After all, with the US limiting or having erected tariffs on Chinese goods, Europe faces the threat of receiving an even greater surfeit of Chinese exports. Some countries are still concerned that action might cause Beijing to cut off access to rare earths and limit the Chinese operations of European multinationals, but years of European export underperformance and the loss of market share in China have concentrated minds. "}],[{"start":367.8500000000001,"text":"And yes, Europe is understandably concerned that the Trump Administration cannot be a reliable partner. But in this case there’s an obvious shared interest. Surely, the US Treasury and European G7 members can work together to press China for a stronger currency? "}],[{"start":384.9500000000001,"text":"The IMF should also get on board. The Fund has so far missed the boat, partly due to its woeful underestimation of Chinese current account surpluses (the autumn 2024 and spring 2025 WEOs respectively projected a 2025 Chinese current account surplus of 1.6 per cent and 1.9 per cent of GDP, vs the 3.7 per cent that actually happened). The Fund’s latest Article IV report for China, though, adopted a tougher tone. "}],[{"start":414.5000000000001,"text":"This summer, the IMF can push for a much stronger renminbi appreciation in its forthcoming External Sector Report. (And as a matter of economic rigour, the IMF should also be far more critical of America’s reckless fiscal policies.)"}],[{"start":429.35000000000014,"text":"Managed trade simply won’t rebalance trade. The latter requires changing China’s growth model. Unquestionably, the prospect for reducing global imbalances in the near term is therefore sadly modest. But a forceful and joint G7 effort to push China into letting its currency appreciate could still play a helpful role."}],[{"start":457.9500000000001,"text":""}]],"url":"https://audio.ftcn.net.cn/album/a_1779249442_1711.mp3"}