China's currency manipulation is a complex and multifaceted issue that has significant implications for the European Union's trade deficit. While the EU grapples with a record-high deficit of €1 billion per day with China, the undervaluation of the Chinese yuan is a key factor that contributes to this imbalance. In this article, I will delve into the intricacies of this topic, offering a fresh perspective and analysis.
The Currency Conundrum
The Chinese currency, officially known as the renminbi (RMB), is undervalued by an estimated 20-25%, according to the Haut Commissariat à la Stratégie au Plan, a French government advisory body. This undervaluation is not solely due to central bank intervention but also because China prevents its currency from appreciating faster by keeping export revenues in Hong Kong rather than converting them into RMB. This strategy has significant implications for the EU's trade deficit.
Impact on EU-China Trade
The EU's deficit with China reached a staggering €359.9 billion in 2025, marking the first time all EU member states had a trade deficit with Beijing, including Germany, the EU's largest economy. This deficit is not solely due to the undervaluation of the yuan but also to the inflation differential between China and the EU, which explains about three-quarters of the loss in external competitiveness. The undervaluation of the yuan, however, plays a significant role in keeping Chinese products competitive, making them around 30-40% cheaper than European equivalents.
EU's Response and Options
The German Chancellor, Friedrich Merz, has suggested that the EU begin dialogue with China on the currency issue, citing the 1985 Plaza Agreement and the European Monetary System as potential models for coordination. However, the US did not push for similar negotiations during the G7 summit, highlighting the complexity of the situation. The EU should monitor China's export prices for sector-by-sector deviations, as this is an important sign of overcapacity and negative price growth.
Broader Implications and Future Developments
The currency manipulation issue raises a deeper question about the role of international institutions in regulating currency values. It also highlights the need for a more coordinated approach to trade imbalances, as seen in the Plaza Agreement. The EU's response should be nuanced, considering the complex interplay of factors contributing to the trade deficit.
In conclusion, China's currency manipulation is a critical issue that requires a thoughtful and strategic response from the EU. While the undervaluation of the yuan is a significant factor, the EU must also consider the broader implications and potential solutions, such as monitoring export prices and engaging in dialogue with China. The future of EU-China trade relations hinges on the ability to navigate this complex landscape effectively.
