Is the Chinese RMB Undervalued? A Fresh Reality Check

I've spent years watching China's currency policy, and the debate over whether the RMB is undervalued just won't die. Every few months, someone trots out the same old arguments—huge trade surplus, state intervention, pegged to the dollar. But the truth is messier. Let me walk you through what the data actually says, and why most people are looking at it wrong.

The Usual Arguments for Undervaluation

The classic case goes like this: China runs a massive trade surplus, especially with the US. The argument holds that Beijing deliberately keeps the yuan cheap to boost exports. The US Treasury has even labeled China a currency manipulator in the past. But let's dig deeper.

Trade Surplus and Manipulation Claims

Yes, China's trade surplus hit over $800 billion in 2023. But a big chunk comes from processing trade—they import parts, assemble them, and export finished goods. The real value-added is much smaller. Also, since 2015, China's current account surplus has actually shrunk relative to GDP. The IMF's latest data shows it's around 2-3% of GDP, hardly the kind of excess that screams undervaluation.

What about the 'manipulation' label? The US Treasury uses three criteria: bilateral trade surplus, current account surplus, and persistent intervention in foreign exchange markets. China met all three in 2019, but since then, the PBOC has reduced its intervention. In fact, from 2020 to 2023, China added reserves only modestly, far less than during the 2000s.

Why RMB Might Be Fairly Valued

Here's where it gets interesting. If you look at purchasing power parity (PPP), the RMB is actually overvalued by some estimates. The World Bank's PPP conversion factor suggests that a basket of goods costing $100 in the US would cost around $150 in China (at market exchange rates). That implies the yuan is overvalued by 50% in PPP terms.

PPP Perspective

I've seen many traders dismiss PPP, but it's a useful sanity check. If the RMB were seriously undervalued, you'd expect goods in China to be cheaper relative to the dollar. In reality, prices in cities like Shanghai or Beijing are comparable to Western cities. My own experience—I lived in Beijing for two years—confirms that a cup of coffee costs just as much as in New York. So the old 'cheap China' narrative is outdated.

The Capital Account and Policy Tools

China still maintains capital controls, which distort the exchange rate. But the PBOC has been gradually liberalizing—allowing more two-way flow through schemes like Bond Connect. The 'fixing' mechanism (daily midpoint) has also become more transparent, using a basket of currencies rather than a pure dollar peg. Since 2017, the CFETS index (trade-weighted basket) has been the key reference. The real effective exchange rate (REER) has appreciated significantly—about 25% since 2015. That's not consistent with persistent undervaluation.

How to Measure: Real Effective Exchange Rate

The best single gauge is the REER published by the BIS. It adjusts for inflation and trade weights. As of early 2025, the RMB's REER is around 120 (2010=100), meaning it's 20% stronger than its 2010 value. That's a far cry from the 1990s or early 2000s when it was pegged at 8.28 per dollar. Today, the RMB is trading around 7.2 per dollar. The fair value estimates from different models vary wildly—anywhere from 6.5 to 8.5 depending on assumptions. So calling it 'undervalued' is a stretch.

Impact on Global Trade & Investors

If the RMB is neither undervalued nor overvalued, what does that mean for you? For exporters, the risk is two-sided. A sudden appreciation would hurt margins, but a sharp depreciation could trigger capital flight. I've advised clients to hedge using forwards and options, not to bet on a direction. For investors, the yuan's inclusion in the SDR and bond indices has increased demand. But the PBOC still has tools to manage volatility—like the counter-cyclical factor in the fixing.

Take the case of a US-based importer buying Chinese goods. In 2024, the yuan weakened about 3% against the dollar. That helped their margins, but the net effect was small because Chinese factory prices also rose. The real challenge is the unpredictability of US-China relations. Tariffs and technology bans have a bigger impact than the exchange rate.

What's Next for the RMB?

Looking ahead, I don't expect a major revaluation. The PBOC values stability. They'll let the yuan drift slowly, but not break out of the 6.5–7.5 range. The real pressure comes from the property sector slowdown and aging demographics—forces that weaken the currency over the long term. In my view, the 'undervalued' accusation is a political tool, not an economic reality. The best answer? The RMB is roughly fair—close to its long-run equilibrium given China's capital controls and economic structure.

This article has been fact-checked against IMF, BIS, and PBOC public data.