On October 8, the People’s Bank of China (PBOC) released a policy statement titled Policy Position on the Renminbi Exchange Rate, systematically addressing recent debates over the valuation of the renminbi (RMB) and global trade imbalances.
In the document, the central bank emphasised that China remains committed to a managed floating exchange rate regime based on market supply and demand, and that it has neither the need nor the intention to gain a competitive advantage in international trade through currency depreciation. It also stressed that a trade surplus cannot automatically be equated with currency undervaluation, much less be used to justify demands for the renminbi to appreciate against the US dollar by a predetermined percentage.
The statement further argues that correcting global imbalances requires adjustments by both surplus and deficit economies. China will continue to expand domestic demand and transform its growth model, while deficit countries should also improve their fiscal positions, increase savings and strengthen industrial competitiveness. At its core, the statement seeks to establish clear boundaries for China’s exchange rate policy and reject the notion that China should bear unilateral responsibility for global economic rebalancing.
Against the backdrop of renewed debate over whether the renminbi is significantly undervalued and intensifying trade frictions between China and the European Union, the Chinese government has used this statement to clarify its position on exchange rate determination, trade competitiveness and the allocation of responsibility for global rebalancing. It draws a clear distinction: China is prepared to contribute to global rebalancing by expanding domestic demand, raising household incomes and pursuing structural reforms, but rejects the idea that external valuation models should dictate the scale and pace of renminbi appreciation.
The statement was released as EU Trade Commissioner Maroš Šefčovič was in Beijing discussing the trade imbalance between China and the European Union. The European side wants China to take measures to narrow the bilateral trade gap, and the renminbi exchange rate has increasingly become part of the European policy debate.
Europe’s concerns about the renminbi now extend well beyond traditional monetary policy discussions. In July this year, French President Emmanuel Macron publicly called for dialogue with China on exchange rates and financial market opening. In her September State of the Union address, European Commission President Ursula von der Leyen warned that the EU’s trade imbalance with China had reached a critical point and said the bloc would use its existing instruments to promote rebalancing.
These developments suggest that the renminbi exchange rate is increasingly being linked to European manufacturing competitiveness, employment and the protection of domestic markets. The PBOC statement’s discussion of energy costs, regulatory policies, investment in innovation and industrial structure can therefore be interpreted as a response to such criticisms.
Another important development is that international institutions and researchers have recently produced new quantitative assessments of the renminbi’s valuation.
In its External Sector Report published in July, the International Monetary Fund (IMF) estimated, based on China’s 2025 current account gap, that the renminbi’s real effective exchange rate was undervalued by approximately 21.3%, according to its staff assessment. However, the same report’s real effective exchange rate index model and level model produced markedly different results, suggesting an overvaluation of approximately 0.5% and an undervaluation of approximately 2.7%, respectively. These substantial differences provide a practical basis for the PBOC’s questioning of the reliability of valuation models and the degree of certainty that can be attached to their conclusions.
On September 22, Federal Reserve researchers published another paper applying the IMF’s earlier external balance assessment framework with updated current account data. Their analysis produced an estimate of approximately 20% undervaluation of the renminbi. When the researchers applied an alternative approach to trade statistics that they proposed, the estimated undervaluation increased to 24.3%.
The debate also concerns how responsibility for global economic rebalancing should be distributed.
The September 1 Chair’s Statement from the G20 Finance Ministers and Central Bank Governors’ Meeting called on surplus economies to remove policies that suppress consumption and reinforce dependence on exports, while also urging deficit economies to increase savings and improve fiscal discipline. A footnote to the statement explicitly recorded China’s objections to several paragraphs, including those addressing global imbalances.
In July, the US Treasury Department stopped short of designating China a currency manipulator, but kept China on its Monitoring List. It also warned that such a designation could still be made if evidence emerged that China was resisting renminbi appreciation through formal or informal channels.
Against this background, the PBOC’s emphasis on having moved away from regular foreign exchange intervention, improving policy transparency, and expanding its reporting of foreign exchange data to the IMF beginning in 2027 appears, at least in part, to be a response to US concerns.
A Historical Overview of the Renminbi Exchange Rate Debate
The controversy surrounding the renminbi exchange rate has continued for more than three decades.
In 1994, China unified its official exchange rate with the rate prevailing in the foreign exchange swap market, established a unified foreign exchange market, and introduced a managed floating exchange rate regime. This marked an important step in the transition from administrative allocation of foreign exchange towards a more market-oriented system.
During the 1997–1998 Asian financial crisis, when several neighbouring countries experienced sharp currency depreciations, China pledged not to devalue the renminbi. At the time, the international community was primarily concerned about competitive devaluations and the potential spread of the financial crisis. The stability of the renminbi was therefore widely regarded as an important contribution to regional financial stability.
Following China’s accession to the World Trade Organization (WTO) in 2001, rapid growth in exports and capital inflows brought the renminbi exchange rate increasingly into the centre of international economic debate. Foreign critics began linking the renminbi’s stability against the US dollar to China’s growing trade surplus, manufacturing competitiveness and employment pressures in the United States.
However, international assessments were far from unanimous. In 2003, a majority of the IMF’s Executive Board directors still considered that there was no clear evidence of significant renminbi undervaluation, while supporting China’s gradual move towards greater exchange rate flexibility.
On July 21, 2005, China launched a new round of exchange rate reform. The renminbi was no longer pegged exclusively to the US dollar, with its value instead managed by reference to a basket of currencies. The exchange rate was adjusted to RMB 8.11 per US dollar that evening. The renminbi subsequently appreciated gradually, although the international controversy over its valuation continued.
Following the outbreak of the global financial crisis in 2008, the renminbi again became relatively stable against the US dollar. In 2010, the PBOC announced further reforms to the exchange rate formation mechanism, with the aim of increasing flexibility.
During this period, policymakers had to balance external financial stability, export-related employment and domestic economic adjustment. The renminbi also began to exhibit more pronounced cyclical movements.
The period around 2015 marked another important turning point.
In May 2015, the IMF explicitly concluded that the renminbi was no longer undervalued, following its substantial appreciation in real effective terms. However, after the exchange rate reform of August 11 that year, expectations of depreciation and capital outflows became major concerns. The PBOC intervened by selling foreign exchange reserves to alleviate downward pressure on the renminbi.
From 2018 onwards, exchange rate issues became increasingly intertwined with the US-China trade war and bilateral trade negotiations.
On August 5, 2019, the US Treasury Department designated China a currency manipulator under legislation dating back to 1988. In January 2020, Washington withdrew that designation, highlighting commitments under the Phase One trade agreement to avoid competitive devaluation and improve transparency.
In recent years, the debate has shifted further towards the renminbi’s real exchange rate, domestic demand and China’s industrial structure.
The IMF has linked China’s relatively low inflation, depreciation of the real exchange rate, weak domestic demand and widening external surplus. It has advocated stronger household consumption, improvements to the social safety net and greater exchange rate flexibility.
An important distinction is often overlooked in these discussions.
The RMB/USD exchange rate measures the price of one currency relative to another. The nominal effective exchange rate reflects a currency’s weighted movements against a basket of trading partners’ currencies, while the real effective exchange rate additionally adjusts for differences in domestic and foreign price levels.
If inflation in China is lower than in its trading partners, the renminbi’s real exchange rate may weaken even if its nominal exchange rate remains stable or appreciates somewhat.
Similarly, the renminbi’s cumulative appreciation since 2005 does not, by itself, prove that the currency is not undervalued today, because economic fundamentals and estimates of the equilibrium exchange rate can change over time.
The Bank for International Settlements (BIS) has explicitly cautioned that the level of an effective exchange rate index relative to its base year cannot, in itself, establish whether a currency is overvalued or undervalued.