Deutsche Bank has noted that the Chinese yuan remains undervalued compared to the euro, contributing to significant trade imbalances between the EU and China.
This disparity has led to a staggering goods deficit of around €360 billion, approximately €1 billion daily, as Chinese products flood the European market at lower prices. Such an imbalance creates challenges for European manufacturers, making it difficult for them to maintain competitive pricing.
The Yuan's Valuation Concerns
According to an IMF analysis cited by ECB President Christine Lagarde, the yuan could be undervalued by 15-16%. In contrast, German Chancellor Friedrich Merz has suggested it might be undervalued by as much as 30%, prompting calls for G7 discussions to investigate the matter further.
A recent study from the German Economic Institute (IW Köln) links the yuan's persistent weakness to the escalating trade deficit in the euro zone. Between early 2020 and spring 2025, the real euro appreciated over 40% against the yuan, highlighting the ongoing currency tension.
This situation is increasingly concerning for Europe. The €360 billion trade deficit signifies a major economic shift toward Chinese industries, affecting various sectors like steel, solar energy, and electric vehicles. Merz’s advocacy for coordinated G7 action indicates that Europe may advance from mere complaints to implementing actual policies, which could include tariffs or measures against dumping.
The European Central Bank is in a delicate position too. While a stronger euro could alleviate inflation by making imports cheaper, it might also hurt the export sector. Lagarde’s reference to the IMF’s undervaluation estimates shows the ECB is monitoring the situation closely, even if it lacks the tools to directly address currency fluctuations.
As tensions rise, potential EU tariffs on Chinese goods may lead to broader market repercussions, affecting risk sentiment across traditional markets. Traders in foreign exchange and macro-sensitive assets should keep an eye on any official G7 statements regarding currency manipulation, as commitments derived from these discussions could have far-reaching effects beyond just the euro-yuan dynamics.
This article is for informational purposes only and does not constitute financial advice.
