International debate regarding the renminbi (RMB) exchange rate has intensified recently. Some argue that the currency is "undervalued," giving Chinese exports a price advantage, i.e., making them "cheaper," and exacerbating global trade imbalances. They therefore advocate RMB appreciation to rebalance global trade. 

How should the RMB exchange rate be assessed? Is its current level reasonable? And what is its relationship with global trade imbalances? Beijing Review reporter Zhang Shasha recently interviewed Zong Liang, a senior researcher at the World Finance Forum and former chief researcher at the Bank of China Research Institute, on these questions. Edited excerpts of their conversation follow:

Beijing Review: Some international assessments have recently described the RMB as "undervalued." How do you view these arguments? Is the RMB exchange rate currently at a reasonable level? 

Zong Liang: Looking back at the RMB's performance in 2025, the currency weakened against the U.S. dollar from the beginning of the year through early April, amid heightened uncertainty over global trade policy and the United States' introduction of "reciprocal tariffs." The offshore RMB exchange rate fell below the 7.4-per-dollar mark.

Thereafter, as domestic and external conditions gradually improved, the RMB recovered against the U.S. dollar. By the end of 2025, both the offshore and onshore exchange rates had strengthened past the 7-per-dollar level.

The RMB continued to appreciate in 2026, with both rates breaking through 6.9 in February to reach their highest levels since April 2023.

According to the People's Bank of China's (PBOC's) View on the RMB Exchange Rate, released on October 8, the currency had appreciated by about 9 percent against the U.S. dollar since the beginning of 2025.

Over the course of last year, the RMB strengthened approximately 4.3 percent against the U.S. dollar. Yet three major RMB exchange rate indices measuring its performance against a basket of currencies edged lower over the year.

There is no contradiction here: The U.S. dollar index (a measure of the currency against a basket of major peers—Ed.) itself fell about 9.4 percent during the same period. In other words, much of the RMB's appreciation against the U.S. dollar reflected the latter's depreciation, rather than a one-way rebound from deliberate undervaluation.

In recent years, annual movements in the RMB exchange rate have remained broadly moderate, adjusting continuously to market conditions. Over this period, the currency has not experienced sustained one-way appreciation or depreciation in any single year; rather, it floats in both directions.

China's foreign exchange (forex) reserves have also remained relatively stable. As of late 2025, the reserves stood at $3.3579 trillion, up 5 percent from the end of the previous year. This increase was mainly attributable to valuation effects arising from the appreciation of non-U.S. dollar currencies and changes in asset prices, rather than large-scale forex net purchases.

Whether a currency is considerably undervalued is generally assessed against three key criteria: whether it appreciates steadily against a basket of currencies, whether forex reserves accumulate at an excessive and sustained pace, and whether there is evidence of persistent, one-way market intervention. None of these indicators support the notion that the RMB has been artificially held down. The question of whether the RMB is undervalued or overvalued therefore cannot be reduced to a simple binary judgment.

Market forces are powerful. Direct intervention in the exchange rate entails substantial costs and constraints, making it an unsustainable long-term policy instrument.

(A government, usually via its central bank, intervenes in the exchange rate by: buying its own currency to push it up using foreign reserves; selling its own currency to push it down, i.e., printing money and buying foreign assets. An exchange rate is the price of one currency in terms of another. Like any price, it's ultimately disciplined by market forces: supply and demand. The price can be overridden temporarily, but doing so builds up costs and pressures that eventually force a correction. So intervention is a short-term tool, not a long-term policy—Ed.)

If China could freely set the RMB exchange rate, there would have been little need for concern or policy adjustments during periods of depreciation pressure and U.S. interest rate hikes. And if intervention alone could reliably stabilize exchange rates, we would not see so many small economies experiencing currency crises.

As for China's current account surplus, we must acknowledge that it has reached a historical high. But the surplus is not determined by the exchange rate alone. According to the national income accounting identity, the current account balance equals the difference between domestic saving and investment. A high saving rate and relatively weak household consumption can therefore contribute to a larger surplus. This relationship does not imply a direct correspondence between the current account balance and the exchange rate.

Other factors also play a role, including the competitiveness of China's manufacturing sector, foreign tariffs and trade diversion. By comparison, the influence of the exchange rate is becoming less significant.

China runs a substantial trade surplus in goods but a deficit in services, while the U.S. has long maintained a surplus in its trade in services. In 2025, China's trade in services exceeded $1 trillion, with exports reaching $384.7 billion and imports totaling $622.8 billion. The deficit narrowed to $238.1 billion, down 7 percent from the previous year. Judging the value of a currency solely by trade in goods is therefore methodologically incomplete.

It is true that specific factors can have an impact. But we should also not generalize from isolated evidence or turn short-term, sector-specific developments into universal rules before declaring a currency undervalued or overvalued by a particular amount.

What is your view on the relationship between the RMB exchange rate and global trade imbalances? 

Global trade imbalances are closely associated with tariffs, particularly the arbitrary, unilateral imposition of tariffs, rather than with exchange rates.

Changes in tariffs inevitably affect trade flows. The spillover effects of geopolitical conflicts can also disrupt global supply chains, drive up inflation and distort trade. It is unfair to overlook these factors and blame global trade imbalances instead on the RMB exchange rate.

Unlike tariffs, which directly affect the prices of goods, exchange rate changes influence trade through price transmission. Their effects can also be diluted by movements in third currencies and shifts in global demand. As a result, exchange rates are not a reliable long-term policy instrument, and economies are unlikely to rely on them as such.

The IMF's 2026 External Sector Report itself noted that persistent elevated current account positions reflect primarily underlying domestic macroeconomic imbalances within individual economies.

Global imbalances should therefore not be simplistically blamed on the alleged undervaluation of the RMB. Reducing their causes to exchange rates alone risks obscuring the underlying issues that need to be addressed.

International trade theory and the principles of balance-of-payments (BoP) analysis offer an important insight: When we discuss imbalances, the focus should be on excessive deficits rather than excessive surpluses. Yet the current debate appears to place disproportionate emphasis on surpluses.

(BoP analysis is the framework for understanding an economy's external balance—its trade, income and financial flows with the world, and for judging whether that position is sustainable and who bears the burden of adjustment. It's the theoretical backbone for the argument that deficit economies, not surplus ones, should move first. A surplus economy is like a household that earns more than it spends and lends the difference to others. A deficit economy is a household that spends more than it earns and borrows the difference. If the borrower keeps borrowing, eventually the lender says "no more." The borrower must adjust: Spend less or earn more. The lender isn't forced to change anything. That's the asymmetry BoP analysis highlights—Ed.)

In addressing global trade imbalances, deficit economies should make appropriate adjustments first. This would help facilitate a more effective resolution of the problem. Of course, as a surplus economy, China is also willing to cooperate proactively and constructively in addressing these issues. BR

Copyedited by Elsbeth van Paridon 

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