 Yuan undervaluation against the Euro: Unfair cost advantages for China?! Evidence for Germany and the Euro areaJürgen Matthes No 36/2025, IW-Reports from Institut der deutschen Wirtschaft (IW) / German Economic Institute Abstract: Compared to 2020, the deficit in merchandise goods trade with China is 3.6 times higher for Germany in 2025 (annualised based on data from January to April 2025) and it has doubled for the Euro area. However, the nominal exchange rate of the Yuan against the Euro has hardly changed between 2020 and 2025. This is all the more striking as European goods have become much more expensive: Producer prices have risen by more than 35 per cent in Germany and the Euro area compared with early 2020, whereas Chinese producer prices have hardly increased at all. The immense producer price divergence is mostly due to an external shock in Europe that resulted from supply chain restrictions in the course of the COVID-19-pandemic and from the energy cost increases after the Russian invasion of Ukraine. This constellation has caused a very large real appreciation (based on producer prices) of the Euro against the Yuan of more than 40 per cent for Germany and for the Euro area between early 2020 and spring 2025. The resulting huge cost disadvantage has likely contributed considerably to the rise in the trade deficit as an appreciation of the Euro renders European exports more expensive and imports from China less costly. Moreover, the real appreciation appears to be an important reason why about half of German industrial firms facing Chinese competition reported in 2024 that Chinese competitors undercut their prices by more than 30 per cent (Matthes, 2024). This large European cost disadvantage would have been prevented if the Yuan had appreciated against the Euro to a significant degree. In fact, a rising trade deficit leads to higher netdemand for Yuan in Euro on the exchange rate market as European importers sell Euro to obtain Yuan in order to buy goods from Chinese sellers. Thus, the Yuan should have appreciated if it was floating freely. However, the Yuan exchange rate is managed by the central bank of China relative to the US Dollar and to a basket of other currencies. As the Yuan did not appreciate against the Euro, the question arises whether this is a case of currency manipulation and whether China's significant cost advantage can be deemed unfair. To investigate this question, also other components of the bilateral balance of payments between the Euro area and China have to be taken into consideration as they also influence the net demand for Yuan in Euro. Indeed, the balances in services trade and in primary incomes (other components of the current account apart from the balance in merchandise goods trade) are positive. Thus, these components reduce the net demand for Yuan in Euro that is caused by the negative goods trade balance, but only to a small degree. Moreover, also capital flows have to be considered (that are measured in the financial account balance). However, there is a lack of data for portfolio investment inflows from China to the Euro area so that total capital inflows cannot be calculated. However, this missing component can be estimated (Chapter 3.2). Based on this estimation, the overall change in the net demand for Yuan in Euro between 2020 and 2024 can also be estimated: it has significantly risen by EUR 125 billion. These findings provide strong indications for currency manipulation and for a significant and unfair undervaluation of the Yuan against the Euro. If there had been a free and market-based bilateral exchange rate market, the rising net demand for Yuan in recent years should have led to a significant appreciation of the Yuan against the Euro. As this was prevented by the central bank of China's currency management policies, a considerable unfair price advantage for China has resulted, which comes at the expense of European companies that compete with Chinese firms on the world market. The large increase in the merchandise trade deficit with China is a clear indication of the relevance of the Yuan's undervaluation against the Euro. As European industry is seriously threatened by this development, trade policy action is urgently warranted in order to re-establish a level playing field. Date: 2025 Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:zbw:iwkrep:323227 Access Statistics for this paper More papers in IW-Reports from Institut der deutschen Wirtschaft (IW) / German Economic Institute Contact information at EDIRC. |
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