Economics

Aug 7, 2026 Gene Frieda

Renminbi appreciation would not, on its own, rebalance China’s economy and eliminate its massive surpluses. But by increasing households’ purchasing power over imports and compressing tradable-sector margins, it would raise the cost of avoiding reform.

LONDON—China’s undervalued exchange rate is often read as a symptom of the imbalance that underlies its surpluses. This is the wrong metaphor. The exchange rate is better understood as a price: by suppressing the renminbi’s value, the Chinese government not only obscures the underlying imbalance, but also disables the main mechanism for correcting it. The result is a deliberate policy of self-harm.