China's central bank published a rare, systematic defense of the yuan just as Europe's trade chief pressed Beijing on a 360.6-billion-euro deficit. The real fight is over who must pay for rebalancing the global economy.
Published 9 October 2026 · 06:00 GMT
Beijing picked the exact day the audience was in the room. On Thursday, October 8, as European Trade Commissioner Maros Sefcovic sat down with Chinese Commerce Minister Wang Wentao for the second session of the EU-China Trade and Investment Council, the People's Bank of China published something it rarely publishes: a full, systematic paper on where China stands on the renminbi exchange rate. The title was bureaucratic. The message was not.
China, the central bank said, has no need or intention to obtain a trade-competitive advantage through exchange-rate depreciation, and has never engaged in competitive currency depreciation. The paper went further than denial. It accused the accusers. Attributing a decline in domestic industrial competitiveness, the weakening of fiscal and financial discipline and complex structural problems simply to the exchange rates of other nations, the People's Bank said, amounts to evading and shirking one's own responsibility for making necessary adjustments. In the polite vocabulary of central banking, that is a slap.
The timing was the argument. Europe's goods trade imbalance with China reached 360.6 billion euros in 2025, up 15 percent, according to EU data. European leaders have begun to fear a "China Shock 2.0" as Chinese industrial exports surge into the single market. In June, European Central Bank President Christine Lagarde urged global leaders to put yuan undervaluation on the agenda as one of the imbalances endangering the world economy. Germany's Chancellor Friedrich Merz has said the yuan is undervalued by 25 to 30 percent. Goldman Sachs said in August that some of its valuation models put the gap at 20 percent or more. From the United States to the IMF, major trading partners have increasingly cited a weak yuan and industrial overcapacity as the drivers of China's record surplus, and those concerns have fueled tariff threats and calls for Beijing to let the yuan appreciate.
Beijing answered with numbers of its own. The yuan has strengthened about 4 percent against the US dollar so far this year, defying a widening yield gap between American and Chinese government bonds. Since the 2005 exchange-rate reform, the currency is up roughly 23 percent against the dollar, from 8.27 to around 6.7 yuan per dollar. Daily yuan trading volume has topped 800 billion dollars out of 10 trillion globally, a scale the central bank says leaves no single institution able to bend the long-term trend. About 30 percent of China's trade is now settled in yuan, making the exchange rate less and less decisive for commerce. And the headline figure of 2025, a record goods surplus of nearly 1.2 trillion dollars, equivalent to about 6 percent of GDP, is expected by analysts to stay elevated this year on exports of artificial intelligence hardware and other advanced technology products.
Beijing's message was simple: the surplus is made in factories, not printed at the central bank.
Because the pressure stopped being theoretical. Sefcovic's October 8 and 9 mission was Europe's attempt to extract "tangible results" on narrowing the deficit, and it arrived in the same fortnight that Brussels has been weighing unilateral measures against Chinese exports. The paper is therefore a pre-emptive boundary, published by a central bank that usually lets its actions speak. Its logic is that China is prepared to contribute to global rebalancing by expanding domestic demand, but it rejects the idea that external valuation models should dictate the pace of renminbi appreciation. A small but telling concession came attached: China will report additional foreign-exchange-related data to the International Monetary Fund starting in 2027, a transparency move aimed squarely at the critics who claim Beijing hides its currency book.
Seven points, in the central bank's telling. The market plays the decisive role in exchange-rate formation; the People's Bank sets no target levels and does not intervene in long-term trends. Claims of undervaluation are "misconceived": periods of yuan appreciation did not hurt trade, and periods of weakness did not increase China's share of global exports, so there is no simple linear relationship between the exchange rate and the current account. International valuation models are immature, the paper says, and treating isolated estimates as proof of undervaluation misrepresents the science. And the surplus, at its root, reflects something else: historically, countries with large trade surpluses have been countries with strong manufacturing sectors. The surplus is made in factories, the argument runs, not printed at the central bank.
That argument only works if the factories are the policy, and this autumn they visibly are. On September 29, the People's Bank rolled out what Asian financial media called four arrows fired at once. It cut the rate on pledged supplementary lending, the PSL facility that funds policy banks, by 25 basis points, taking the one-year rate to 1.5 percent. It broadened the PSL's scope to a list Beijing now calls the "six networks": water systems, new-type power grids, computing-power networks, next-generation communications networks, urban pipe networks, and logistics networks. It raised the relending quota for scientific and technological innovation and equipment upgrades by 200 billion yuan, about 29.84 billion dollars, to a total of 1.4 trillion yuan. And it increased the relending quota for agriculture and small businesses by 500 billion yuan to 4.85 trillion yuan, including a 300-billion-yuan increase for private enterprises to 1.3 trillion yuan. Alongside, the finance ministry and financial regulator announced a one-percentage-point interest subsidy for eligible first-time homebuyers from October 1, for up to five years, capped at 1 million yuan per household, for homes of no more than 120 square metres and 1.5 million yuan.
The manufacturing data gave the package something to stand on. China's official manufacturing purchasing managers' index climbed to 50.1 in September from 49.8 in August, crossing back into expansion for the first time in three months, with the production subindex at 51.7, the highest of the year. The private RatingDog survey was stronger still at 52.1, a five-month high, and services joined in at 51.6. The caveat sits in plain sight: new export orders barely held the expansion line at 50.0, and analysts keep saying the same thing. "Manufacturing has been a relative strength this year, though it has mostly been driven by external demand as domestic consumption and investment lag," wrote Lynn Song, ING's chief economist for Greater China. The factory is humming. The home is not.
There is a second industrial-policy story running underneath the currency debate, and it cuts the other way: Beijing is raising costs on its own exporters. From September 1, lithium-ion batteries lost their decade-long consumption-tax exemption and now carry a 2 percent levy, rising to 4 percent in September 2027. Directly exported batteries stay exempt, but the separate VAT export rebate for batteries was cut from 9 to 6 percent in April and disappears entirely on January 1, 2027; solar products lost their VAT rebates in April. Meanwhile sodium-ion and solid-state batteries keep exemptions through 2028, a deliberate tilt toward the technologies Beijing wants to dominate next. A September research note from Citi went further, citing the China Passenger Car Association's Cui Dongshu as expecting the 13 percent VAT export rebate on electric vehicles to be phased down step by step starting next year, although the finance ministry has not confirmed it. Huatai Securities called the battery tax impact manageable for the giants, and brutal for producers competing on price alone. The design is deliberate: tax the mature, shield the frontier, and let consolidation kill the weak. Beijing's answer to the overcapacity charge is not to deny the surplus. It is to re-engineer the machine that produces it.
Geopolitically, the paper is a sovereignty document. A central bank does not publish a seven-point currency manifesto unless it expects the fight to move from rhetoric to measures, and the IMF-reporting pledge for 2027 is Beijing buying insurance before the arguments of 2027 are made. Macroeconomically, the backdrop is the K-shaped divergence ING flagged this week: strategic industry funded through PSL and relending pipes, while households get a mortgage subsidy capped at 1 million yuan and a property market still searching for its floor. Second-quarter growth of 4.3 percent sits below the 4.5 to 5.0 percent target, and the Wall Street Journal's verdict this week was blunt: HSBC's Frederic Neumann called it "not the big bazooka." Demographically, the deeper message of the paper is that Beijing wants rebalancing through household income and domestic demand, not through a currency move that would shrink the purchasing power of the very surpluses it is trying to recycle. Historically, the People's Bank keeps returning to 2005: 23 percent appreciation, no collapse of the export machine, which in its telling proves the machine was never the currency. Structurally, the 30 percent of trade now settled in yuan is the quiet revolution, the slow construction of a system where the dollar's price matters less with each passing year.
Three clocks are ticking. The first is the calendar: China's September trade data and third-quarter GDP arrive in the coming days, and a strong exports print will make Beijing's argument for it while a weak one will make the stimulus hawks louder. The second is the negotiating room: Sefcovic's second day in Beijing on October 9, and whether Brussels moves from talk of safeguards to measures. The third is the exchange rate itself: the yuan's roughly 4 percent gain this year has already done more appreciation work than a year of European speeches, and if it continues, Beijing will argue the market has delivered the rebalancing others demand by politics. The paper says China neither needs nor intends to use depreciation for advantage. The harder question, the one the next three months will answer, is whether the rest of the world believes it.
Read from Washington, London, or Frankfurt, the paper is defiance dressed as economics. Western coverage has foregrounded the timing, Sefcovic in Beijing, Lagarde's June call for a global debate, Merz's 25-to-30-percent figure, Goldman Sachs's 20-percent models, and the IMF's growing alarm, as proof that the surplus is a policy choice wearing market clothes. The Wall Street Journal's 'half measures' verdict this week sharpened the critique: mortgage subsidies, state-bank capital and infrastructure pipes are incremental when growth runs at 4.3 percent against a 4.5-to-5.0-percent target. In this reading, Beijing's currency paper is a shield raised precisely because the industrial machine it protects keeps flooding the world with exports.
The Western prescription follows the diagnosis: appreciation, then rebalancing. A stronger yuan would narrow the 360.6-billion-euro European deficit and the nearly 1.2-trillion-dollar global surplus, ease protectionist pressure, and test whether China's manufacturing edge survives on productivity rather than price. The risk Western policymakers privately weigh is that Beijing's paper marks the end of even rhetorical flexibility, and that the next phase of the contest is fought with safeguard measures and tariffs rather than communiques.
Note on coverage: in the English-language record available to this newsroom, no mainland Chinese outlet published its own account of the October 8 paper; the detailed treatment comes from Western wires and Taiwan-based financial coverage. Read through that Eastern lens, the paper is not defiance but doctrine. Chinese-language financial coverage framed the September 29 package as 'four arrows fired simultaneously' and the October 8 statement as a rare, concentrated articulation of seven core positions, a systematic narrative rather than a reactive denial. The emphasis falls on the 15th Five-Year Plan horizon: growth-model transformation, expanded domestic demand, high-standard opening up, and yuan internationalization, with 30 percent of trade already settled in renminbi.
In this reading, the argument that valuation models are immature is the point, not an evasion: if the market now decides the exchange rate, then external demands for a politically set appreciation contradict the market principles the West itself preaches. The IMF-reporting pledge for 2027 is presented as transparency on China's terms. And the real policy is the industrial one, the six networks, the relending pipes, the tax tilt from mature lithium-ion to solid-state, which is a supply-side restructuring that Europe's trade politics cannot easily absorb, because it answers the overcapacity charge by upgrading the machine rather than shrinking it.
From the Global South, the currency quarrel is a rich-country fight fought with developing-country consequences. A weaker yuan means cheaper Chinese goods, and for Southern consumers and importers that has meant affordable solar panels, phones, and machinery. For Southern producers, it has meant something harsher: the same exports that Brussels calls overcapacity are the ones undercutting nascent industries in Africa, Latin America, and Southeast Asia. The South has lived the 'China Shock' not as theory but as shuttered factories, and it notices that neither side in the yuan debate is asking what appreciation or safeguards would do to Southern markets.
But the South also reads leverage, not victimhood. Beijing's promise to rebalance through domestic demand, and the 30 percent of Chinese trade now settled in yuan, matter for the de-dollarization debates running through Southern capitals, from yuan-denominated oil deals to local-currency swaps. The verdict in Southern chancelleries is cool-eyed: whoever wins the argument about the yuan, the South will keep trading with China on price, and it will keep building its own walls, quietly, while the North argues about exchange rates.
Every outlet we reviewed agrees on the core facts: on October 8 the PBOC published a rare, direct rebuttal to claims that the yuan is undervalued, timed to the visit of EU Trade Commissioner Maros Sefcovic to Beijing and a broader wave of protectionist pressure, including US tariff threats, over China's record surplus.
Analysts and officials do not agree on valuation: German Chancellor Friedrich Merz puts the undervaluation at 25 to 30 percent and Goldman Sachs at 20 percent or more on some models, while the PBOC calls the claims 'misconceived' and argues valuation models are immature. They also disagree on the driver of the surplus: industrial competitiveness and capacity for Beijing, a deliberately weak currency for the critics.
We know the figures both sides cite: a 360.6-billion-euro EU deficit in 2025, a nearly 1.2-trillion-dollar Chinese goods surplus, a yuan up about 4 percent this year and 23 percent since 2005, 30 percent of China's trade settled in yuan, and a September 29 stimulus package built around PSL and relending tools plus a one-percentage-point mortgage subsidy from October 1.
We do not yet know whether Brussels or Washington will move from accusations to measures, whether September trade data and third-quarter GDP will strengthen Beijing's hand or the stimulus hawks', or whether the yuan's 2026 rally holds through year end.
We expect Europe to keep pressing Beijing, likely through safeguard discussions, while China leans on targeted credit tools rather than broad easing, and uses its promised 2027 IMF data reporting as evidence that the currency book is open.
The paper landed on October 8 as EU Trade Commissioner Maros Sefcovic began two days of talks in Beijing aimed at narrowing Europe's 360.6-billion-euro goods deficit. With ECB President Christine Lagarde calling for a global debate on yuan undervaluation, Germany's chancellor citing a 25-to-30-percent gap, and US tariff threats simmering, Beijing drew a public line before pressure could harden into policy. It paired defiance with a concession: more foreign-exchange data for the IMF from 2027.
Goldman Sachs said in August that some of its models show the yuan undervalued by 20 percent or more, and Friedrich Merz cited 25 to 30 percent. The PBOC rejects the exercise: past yuan appreciation did not hurt trade, past weakness did not lift China's export share, and no simple linear link connects the exchange rate to the current account. One uncontested fact helps its case: the yuan has risen about 4 percent against the dollar in 2026.
They are the infrastructure systems the September 29 package steered pledged supplementary lending toward: water, new-type power grids, computing power, next-generation communications, urban pipe networks, and logistics. The same package raised sci-tech innovation relending by 200 billion yuan to 1.4 trillion yuan, and farm and small-business relending by 500 billion yuan to 4.85 trillion yuan.
They are Beijing's answer to the overcapacity charge. Since September 1, lithium-ion batteries carry a 2 percent consumption tax, rising to 4 percent in 2027, while VAT export rebates on batteries fall from 6 percent to zero on January 1, 2027; solar lost its rebates in April. Frontier technologies like sodium-ion and solid-state batteries stay exempt through 2028. The design taxes the mature, shields the frontier, and forces consolidation instead of a price war.
Unlikely on its own. Europe's grievance is the deficit and the export surge, and Brussels is weighing safeguard measures regardless of Beijing's currency arguments. The paper's real function is defensive: it sets the terms under which China will discuss rebalancing, through domestic demand and household income, not through an appreciation ordered from abroad. The decisive test is the second day of Sefcovic's visit and the trade data due in the coming days.
