1. On Oct. 8, the People's Bank of China issued an unusual statement outlining its exchange-rate policy, reiterating that it does not pursue competitive devaluation or set a target exchange rate, amid growing international scrutiny of the yuan's valuation and China's export competitiveness. [para. 1]
2. The statement coincided with the second China-EU trade and investment consultation mechanism meeting held Oct. 8–9, which addressed trade and investment balance, market access, and other bilateral concerns. This meeting served as the immediate backdrop for the central bank's move. [para. 2]
3. European scrutiny of the yuan has intensified recently. In June, ECB President Christine Lagarde cited IMF estimates suggesting the yuan's real exchange rate was undervalued by about 16%. In July, German Chancellor Friedrich Merz put the undervaluation at 25%–30% and called for exchange-rate policy talks with China, as concerns intersect with debates over China's widening trade surplus and pressure on European manufacturing competitiveness. [para. 3]
4. The PBoC's statement served two purposes: to reaffirm that China does not use competitive devaluation to secure an export advantage, and to reject the view that exchange rates alone explain global trade imbalances. Notably, the estimates underlying undervaluation claims are inconsistent; the IMF's 2026 External Sector Report (released July 30) produced markedly different results across its models: the current-account model implied undervaluation of 21.3%, while the real exchange-rate index model suggested overvaluation of 0.5% and the level model indicated undervaluation of 2.7%. These differences underscore the absence of a single, agreed measure of an equilibrium exchange rate. An estimated gap in the yuan's real effective exchange rate does not imply that it must appreciate by the same percentage against the dollar. [para. 4][para. 5][para. 6]
5. The author views the statement primarily as an exercise in external policy communication, not a signal of a change in currency policy. Gradual, market-driven appreciation remains likely, but a sharp, one-off revaluation does not. The closest historical comparison is August 2019, when escalating U.S.-China trade tensions prompted a series of PBoC statements on the yuan. [para. 7][para. 8]
6. In the 2019 episode, the U.S. announced plans on Aug. 1 to impose a 10% tariff on about $300 billion of Chinese goods. On Aug. 5, both onshore and offshore yuan weakened past 7 per dollar, prompting the PBoC to emphasize market supply and demand. The U.S. Treasury designated China a currency manipulator that same day; the PBoC issued a formal rebuttal on Aug. 6, and its daily reference rate weakened past 7 on Aug. 8. The dispute eased as trade negotiations progressed, leading to a phase-one trade deal (agreed upon in principle in October, text in December). Treasury removed the manipulator designation on Jan. 13, 2020, two days before the agreement was signed, which included provisions on exchange-rate policy and transparency. [para. 9][para. 10][para. 11]
7. The direction of pressure differs today: in 2019, the PBoC was responding to depreciation and U.S. manipulation allegations; in October 2026, it responds more directly to European and U.S. calls for appreciation. Both episodes demonstrate the close connection between currency disputes and trade negotiations, but neither signals a fundamental shift in the PBoC's exchange-rate framework. The PBoC states it does not predetermine an exchange-rate target or intervene in the yuan's long-term trend, having withdrawn from routine foreign-exchange intervention after 2017, prioritizing prevention of sharp short-term movements. Market forces determine direction while policy manages the pace of adjustment, allowing two-way movements. External pressure may prompt more policy communication but is unlikely to determine the yuan's level; the October China-EU joint statement contained no commitment to yuan appreciation. Furthermore, a trade surplus does not necessarily translate into sustained, one-way appreciation, as foreign currency earned through trade can flow abroad through investments as the financial account gradually opens. [para. 12][para. 13][para. 14][para. 15]
8. The author's baseline forecast is for moderate yuan appreciation through the rest of 2026, with the dollar trading around 6.6–6.7 yuan by year-end. Support comes from improving export competitiveness, a large trade surplus, and companies' accumulated foreign-currency earnings representing potential demand for yuan. Orderly appreciation could help ease external trade friction. However, rapid appreciation would carry costs, squeezing exporters relying on price competitiveness and creating a feedback loop that amplifies exchange-rate movements through concentrated conversions and capital inflows. Historical experience shows appreciation occurs in phases without a fixed annual ceiling (6.7% in 2017, 6.5% in 2020, 2.6% in 2021, 4.2% in 2025). Taking this and the policy environment into account, full-year appreciation of 4%–6% is the baseline scenario. Using the end-2025 onshore spot rate of about 6.99 yuan per dollar, this corresponds to a year-end rate of roughly 6.6–6.7—an author forecast, not a central-bank target. [para. 16][para. 17][para. 18][para. 19][para. 20][para. 21]
9. The dollar cycle and cross-border capital flows will continue to influence short-term movements, but on balance, support from the trade surplus and policy management of the pace of adjustment favor gradual appreciation rather than a rapid, one-way rise. Zhou Junzhi is chief macroeconomic analyst at CSC Financial and an external master's tutor at Zhejiang University. [para. 22][para. 23]
AI generated, for reference only
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