China’s currency, the yuan, may be as much as 25% undervalued when measured against global trade fundamentals, according to new research from Goldman Sachs. The assessment highlights growing tensions in the international currency system, renewed scrutiny of China’s exchange-rate policy, and rising concerns among economists that Beijing’s undervalued currency is distorting trade flows and global competitiveness.
The claim comes at a sensitive moment: China is battling sluggish economic growth, weak consumer confidence, mounting debt risks, and structural challenges in its property sector. At the same time, Chinese exports have unexpectedly rebounded, prompting questions about whether currency undervaluation is artificially bolstering the country’s trade advantage.
Goldman’s analysis ignites a broader debate over whether China may be leaning more heavily on exchange-rate strategy as a stabilizing tool—and whether the global economy is prepared for the consequences. 
How Goldman Sachs Reached the 25% Undervaluation Estimate
The bank’s currency strategists examined China’s real effective exchange rate (REER)—a metric that evaluates the yuan relative to the currencies of major trading partners, adjusted for inflation differentials. Their conclusion: based on long-term trade patterns, productivity trends, and pricing data, the yuan trades significantly below fair value.
Key findings include:
- China’s REER has weakened materially over the last two years.
- Export volumes have held up despite global demand slowdown.
- Chinese goods remain cheaper internationally even after inflation.
- China’s trade surplus remains structurally high by global standards.
Taken together, these factors point to a substantial currency undervaluation that is amplifying China’s competitiveness on the global stage.
Why the Yuan Is So Weak: Structural and Policy Drivers
A 25% undervaluation does not occur overnight. Goldman identifies several forces shaping the yuan’s trajectory.
1. Capital Outflows and Investor Caution
Foreign investors have withdrawn billions from Chinese stocks and bonds due to:
- Geopolitical risk
- Beijing’s regulatory crackdowns
- Weak corporate earnings
- Concerns about data transparency
- Slowing domestic growth
These outflows put downward pressure on the currency.
2. Persistent Monetary Easing
China’s central bank has been cutting rates while the U.S. Federal Reserve raised them. This widening rate gap incentivizes capital to move out of China—and into higher-yielding U.S. assets.
3. Weak Consumer Demand at Home
China’s economic recovery has faltered, with consumers reluctant to spend and domestic investors shifting to safer assets. This creates deflationary pressures that weigh on the yuan.
4. Beijing’s Hands-On Currency Management
Unlike fully floating currencies, the yuan trades within a controlled band.
While China denies actively devaluing its currency, analysts note that policymakers have allowed gradual depreciation as a tool to support exports.
A Cheaper Yuan Gives China a Significant Export Advantage
An undervalued currency boosts export competitiveness by:
- Lowering the foreign price of Chinese goods
- Encouraging volume gains in global markets
- Helping Chinese manufacturers maintain margins under global price pressure
- Supporting domestic employment in export-heavy regions
China’s trade surplus—already one of the largest in the world—has remained remarkably strong despite global slowdown. This resilience may reflect China’s currency tailwinds as much as its capacity and cost efficiencies.
Global Reaction: Growing Frustration Among Trade Partners
The Goldman estimate is likely to raise concerns in Washington, Brussels, Tokyo, and other major trade capitals.
United States
U.S. officials have long accused China of keeping its currency artificially low to support exports—a claim China disputes.
A 25% undervaluation could reignite political pressure for:
- Tariffs
- Countervailing duties
- New currency manipulation investigations
As U.S.–China tensions escalate, the yuan’s valuation will increasingly be viewed through a geopolitical lens.
European Union
Europe’s manufacturers are already facing intense competition from low-priced Chinese goods, particularly EVs, solar panels, machinery, and consumer electronics.
An undervalued yuan amplifies cost disparities, strengthening China’s position in global supply chains.
Emerging Markets
Countries like India, Vietnam, and Indonesia worry that a weak yuan undermines their own export competitiveness.
Some central banks may intervene in their currency markets to prevent excessive appreciation against the yuan.
Does an Undervalued Yuan Reflect Weakness or Strategy?
Economists debate the meaning of the 25% figure.
There are two competing interpretations:
Interpretation 1: China Is Weak and Needs a Soft Yuan
- Domestic demand is fragile
- The property crisis is unresolved
- Youth unemployment remains high
- Deflation pressures persist
- Private business confidence is low
In this view, a weaker yuan is a symptom of China’s structural challenges—not deliberate manipulation.
Interpretation 2: China Is Strategically Leveraging Its Currency
- Export strength buffers the economy
- A cheaper yuan sustains factory activity
- It prevents mass unemployment
- It supports China’s geopolitical influence in trade
In this scenario, Beijing may be quietly tolerating a weaker yuan to avoid deeper economic pain before structural reforms take hold.
What an Undervalued Yuan Means for Global Markets
A currency misaligned by 25% has wide-reaching implications:
1. Deflation Pressure Globally
Cheap Chinese goods push down prices around the world, complicating central bank efforts to manage inflation.
2. Supply Chains Tilt Back Toward China
Efforts by Western nations to diversify supply chains may slow if China regains cost dominance.
3. Emerging Markets Lose Competitive Ground
ASEAN and South Asian nations—key alternatives to China—struggle when China’s export prices fall.
4. Commodities Face Volatility
A weaker yuan reduces China’s commodity purchasing power, affecting oil, metals, and agricultural markets.
5. Equity Markets React to Capital Flow Shifts
Weakness in China’s currency often corresponds to weaker global risk sentiment.
Will China Allow the Yuan to Strengthen?
In theory, a stronger yuan would:
- Boost household purchasing power
- Improve investor confidence
- Reduce trade frictions
- Support China’s long-term ambition to internationalize its currency
But in practice, China may be reluctant to risk weakening its export engine—especially during a fragile recovery.
Goldman analysts note that Beijing is unlikely to engineer a strong yuan unless:
- Domestic growth stabilizes
- Private investment rebounds
- The property sector finds firm footing
- Global demand remains strong
Until then, policymakers may tolerate currency undervaluation as a stabilizing force.
Conclusion: A Currency Out of Balance With Global Trade Reality
Goldman Sachs’ assessment that China’s yuan is 25% undervalued underscores the enormous complexities shaping global currency markets today. Whether this undervaluation is a product of economic weakness, policy design, or a combination of both, it creates powerful ripple effects across global trade, investment flows, and geopolitical alignments.
As governments increasingly view currencies not just as economic tools—but as strategic assets in a broader competition for global influence—the debate over China’s yuan is poised to intensify.
The valuation gap may persist for years, but its consequences will shape supply chains, inflation patterns, and international relations well into the next decade.
