THE YUAN IS MORE THAN A SYMPTON OF GLOBAL IMBALANCES / THE ECONOMIST

Adding balance

The yuan is more than a symptom of global imbalances

Treating it as a mere by-product of deeper distortions lets China off too easily, argue Anantha Nageswaran and P.S. Srinivas

Illustration: Sam Kerr

In a recent essay for The Economist, Gita Gopinath, Pierre-Olivier Gourinchas and Hélène Rey argue that China’s persistent surpluses and America’s persistent deficits should not be blamed on an undervalued yuan. 

The exchange rate, they say, is an outcome of domestic savings and investment choices, not an independent lever for correcting them. 

The argument is sound as far as it goes: exchange rates do reflect domestic fundamentals over the long run.

But it goes too far in treating the yuan as merely a reflection of deeper distortions, as if the currency were external to the policy regime that sustains them.

The essay’s policy conclusion—that the exchange rate is not an independent lever—depends on assuming savings and investment drive the currency, rather than the other way round or a two-way relationship. 

Yes, a country that saves too much relative to investment will tend to run a current-account surplus, often alongside a weaker real exchange rate. 

That, however, does not make the exchange rate analytically secondary in every case.

In the short run, the exchange rate is also a policy lever in its own right. 

If it were not, the imf would not have long made currency devaluation a standard part of its structural-adjustment conditionality—a tacit admission that exchange rates matter independently of the policies behind them. 

In China the same state-led institutions that depress consumption also prevent the currency from adjusting freely. 

The exchange rate is not outside the imbalance; it is one of the channels through which the imbalance is generated.

The spillovers are real and increasingly visible in the data. 

China’s goods-trade surplus hit a record $1.2trn in 2025, up a fifth on the year before, even as exports to America fell sharply; the shortfall was more than made good by a surge in shipments elsewhere. 

A hyper-competitive currency that keeps Chinese goods cheap abroad forces competitors to hold down their own exchange rates in turn, exporting the adjustment problem rather than solving it: China’s biggest export of late has been its deflation. 

Export prices are still rising more slowly than its trading partners’, even as domestic producer prices have recently ticked up.

This is where the authors’ preferred alternative is weaker than it looks. 

Household consumption’s share of Chinese gdp stood at roughly 40% in 2024—almost exactly where it stood two decades earlier, even as Wen Jiabao flagged China’s “unbalanced” growth model as a policy priority. 

Two decades of stated intent have barely moved the number at all. 

A currency level is visible every day. 

A reform pledge can be obscured indefinitely.

The authors are right to reject the fantasy that China could revalue tomorrow and solve the problem outright. 

A sharp appreciation, taken in isolation, could intensify deflationary pressure and weaken domestic demand—though the pass-through from currency moves to domestic prices tends to be smaller than the worst-case framing assumes.

The imf’s own 2026 External Sector Report puts the yuan’s undervaluation at a midpoint of 21.3%, with some market estimates running higher still. 

Suppose it closed at the imf’s midpoint. 

It would shift demand from domestic goods to imports and render some domestic capacity redundant, taking it out of circulation—both of which are welcome from a rebalancing standpoint. 

Among many other reasons, a firmer yuan would ease the costly sterilised intervention needed to hold the currency down, lower the cost of imported energy and commodities that feed into domestic prices, and reduce the trade friction its undervaluation increasingly invites abroad—gains to China itself, not favours to its trading partners. 

The real question is whether sustained appreciation pressure, paired with financial liberalisation and domestic reform, can shift incentives that two decades of polite exhortation have not.

China’s current-account surplus has swung considerably over the past two decades. 

But that volatility reflects where the excess savings went, not whether the underlying imbalance was fixed: a sharp narrowing of the surplus in 2007-18 coincided with a domestic investment boom, not a rise in household consumption. 

The entrenched piece is the savings-investment gap itself—rooted in local-government finance, state-bank balance-sheets and the political weight of the tradable sector, not its current-account expression, which moves far more easily than the structure producing it. 

That is what makes it slower and costlier to rebalance than an American fiscal deficit that unfolds within an electoral cycle and an independent central bank. 

Treating the two sides as symmetrical lets the more entrenched imbalance escape scrutiny.

America must also adjust its own fiscal policy to narrow the deficit that attracts global capital. 

Developing countries are squeezed from both directions: China’s excess capacity crowds out their own manufacturers, while American deficits draw investment away from them instead. 

A deficit country at least sustains demand for what others sell it.

A real appreciation of the yuan, alongside genuine fiscal adjustment in America, would do more to rebalance global demand and ease pressure towards beggar-thy-neighbour trade measures than either side’s reforms alone. 

It would also help reinvigorate growth in many developing economies and stabilise their societies, improving the prospects for a less conflict-prone world. 

The yuan is part of the policy architecture that shapes global imbalances, not a decorative outcome that sits outside it.

Of course, it is pointless to wonder who in the world can engineer an appreciation of the yuan all on their own. 

Only China can do it. 

So far, it has avoided the question. 

In an insightful recent post on China’s “k-shaped policy regime”, Yasheng Huang of mit Sloan suggests that addressing domestic demand is a political challenge in China because it requires the state to cede power, whereas a supply-side response does not. 

Exports, trade performance and hence the need for a competitive currency fall in the supply-side camp. 

The question of what will persuade China to contribute to rebalancing global demand remains open.