Inside China 08 January 2026

RMB the lubricant, not engine

Jeremy Stevens

Despite the CNY in December last year firming to USD by appreciating by 2.2%, the CNY still weakened by 3.4% on a trade-weighted basis in 2025. Indeed, the renminbi's ‘appreciation’ stemmed from the dollar weakening. The renminbi is not a free-floating currency; it is a high-beta claim on the USD cycle, with most of its trade-weighted variance explained by DXY moves rather than by domestic shocks. Therefore, as for 2026, given our USD view, USD/CNY seems likely to trade around a 6.6-6.4 corridor before the next lunar year is out. Beijing would be likely to accommodate such trade via a stronger fixing that lags spot, rather than resisting it.
The more instructive prism though is the trade-weighted index, where the yuan remains below any productivity-adjusted long-run anchor. Policymakers know that every 1% firming of the REER slices roughly 30 bps off average export margins, which is potentially decisive for the low-tech bulk (garments, steel, ceramics) residing at cash-breakeven.
Granted, Beijing has allowed the currency to act as shock-absorber against a stronger greenback but it did not target a weaker renminbi to acquire market share. The renminbi’s real depreciation is best viewed as a contingent accelerator—useful, visible, but nowhere near the core.
Export competitiveness is aided by structural subsidies—negative-real deposit rates, VAT rebates and sub-market energy tariffs—dwarfing any FX effect. Complementing this is factory-gate deflation which has quietly shaved 5% off the renminbi cost base since 2021, letting exporters lob a further 3%off their dollar invoice prices without touching margins. Then, China has experienced a surge in labour productivity (manufacturing output has jumped 31% with a flat headcount in the post-pandemic period), thereby cutting unit-labour costs. This is why China’s merchandise trade surplus has gone ever higher since 2020, irrespective of the currencies’ relative level.
In barely three years, the surplus has shifted from the North to the South, and two-thirds of the surplus with the South comes from capital and intermediate goods. This speed, re-direction and shifting higher up the value chain, explains why the surplus appears more politically toxic today despite a much smaller GDP ratio.
Despite the 15% decline in the real effective exchange rate (REER) over the past two years seeming a classic competitive devaluation, most of the fall was the automatic consequence of global inflation differentials. The yuan should have strengthened 7–10% in nominal terms just to keep the real exchange rate constant; that failure to appreciate accounts for the lion’s share of the decline.
China’s export juggernaut is still margin-accretive—but the dispersion is now so wide that the headline surplus conceals two entirely different businesses. Aggregate these two universes, and the ‘miracle’ is no mystery. A thin sliver of high-value clusters earns offshore returns akin to Silicon Valley, while the sprawling low-tech mass lives on cash-breakeven pricing that would likely trigger anti-dumping petitions anywhere else.
The real critical question for 2026, then, is not whether Beijing likes a stronger yuan; it is whether the rent embedded in factor-price distortion and productivity gains is sufficient to allow the surplus keep ballooning, even after the exchange-rate cushion is quietly removed.

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