A stronger renminbi is not quick fix for global imbalances

BEIJING — In recent discussions about global macroeconomic imbalances, the Chinese renminbi has emerged as a focal point. China's merchandise trade surplus has reached an astonishing $1.2 trillion in 2025, and its manufacturing sector has grown in prominence. Many financial and economic commentators now agree that the renminbi is severely undervalued.

The apparent solution, according to this near-unanimous view, is for China to allow its currency to appreciate sharply. This would reduce the surplus, lessen competitive pressure on manufacturers internationally, and contribute to rebalancing the global economy. The proposal is politically appealing, as it seems to offer a straightforward resolution to a complex problem.

However, this solution is not without its flaws. To truly determine whether an exchange-rate appreciation would be beneficial for China, one must first understand the root cause of the currency's weakness. If the devaluation is primarily due to intentional actions to boost exports, then a sharp appreciation could indeed be a relatively clean and effective remedy.

But if the devaluation is instead a result of weak domestic demand, then allowing the currency to appreciate without addressing the underlying weakness would not solve the problem, and could even exacerbate it.