1 articles · Updated · Peterson Institute for International Economics · Nov 9
Summary
China’s real effective exchange rate is estimated to be about 20% undervalued in 2026, a gap the report says is driving the country’s trade surplus above levels seen during the 2000s “China Shock.”
The estimate rests on a sharp REER decline since 2022 as China faced deflation while trading partners saw inflation; the currency is about 8% below trend, but the full gap is larger because even trend levels historically coincide with big surpluses.
A model using 1994–2025 data finds China’s exchange rate would need to rise enough to close a current-account surplus that remains inflated even after excluding nonmonetary gold imports, which are on track to hit a record 1.0% of GDP in 2026.
The report says Beijing still has multiple levers over the exchange rate, so any meaningful appreciation would require active policy support—one reason Europe is preparing to raise the issue with China while the United States remains largely silent.
Beyond currency moves, the analysis argues China needs broader rebalancing—stronger domestic consumption, social safety-net reforms and easier market access for foreign firms—to reduce global trade tensions and support more sustainable growth.