According to a study from the Institute of the German Economy (IW), which is supported by the Federal Foreign Office, the currency maintained at an artificially low rate by China is costing Germany growth. The research suggests that if the Yuan were fairly valued, German Gross Domestic Product (GDP) could be over 40 billion euros higher in three years.
This has become particularly evident since the massive price increases observed in Germany starting in 2021, driven by supply chain bottlenecks and the energy crisis. China deliberately prevents the Yuan from appreciating against the Euro. By systematically undervaluing the currency, China makes its exports cheaper while simultaneously driving up the cost of imports. As a consequence, German exports to China have dropped significantly, while imports of Chinese goods have massively increased. Germany’s trade deficit with China has consequently climbed to around 90 billion euros. Despite the growing demand for the Yuan to pay for Chinese merchandise, the currency has not risen in value because China does not allow a free exchange rate; instead, it operates under a state-controlled currency management system.
The IW report further indicates that a fair valuation of the Yuan would benefit China by helping to better balance the country’s export-heavy and consumption-weak economy. While a drop in exports might lead to a short-term contraction in China’s GDP, the simulation showed this would quickly be countered by a rise in domestic demand.
According to IW expert Jürgen Matthes, China’s currency management is “poison” to free trade. He argues that by undervaluing the Yuan, China sells its goods far cheaper than they should realistically be, thereby capturing market shares it would never gain in fair competition. The foreign trade expert suggests that Europe should implement countervailing duties to ensure a level playing field.
