How a currency’s value is framed decides what a reader believes Beijing can afford to do next — and whether the export surplus behind the trade frictions many economists call “China shock 2.0” is a problem to fix or the purpose of the growth model.

An Aug. 4 Wall Street Journal column by chief China correspondent Lingling Wei takes the second view. It explains the yuan’s cheapness as the product of China’s growth model: high savings, state-directed investment and weak domestic demand. Its conclusion is that Xi Jinping’s preference for a strong-looking yuan is not enough, on its own, to change that. Mark Sobel’s estimate anchors the argument: he calculates that the yuan is 20% to 30% undervalued.

That number is not a settled measurement. It is Sobel’s model-based estimate, reached by running China’s current-account figures through the International Monetary Fund’s exchange-rate framework. The IMF’s own External Sector Report puts the yuan’s undervaluation at roughly 16%, while a Goldman Sachs trade-basis estimate reaches about 25%. Different assumptions produce different answers, which makes the headline range useful as a warning about China’s competitiveness but too blunt to serve as an unquestionable fact.

The real exchange rate makes the same point from another direction. Sobel says the inflation-adjusted yuan remains roughly 15% below its 2022 level. When U.S. inflation runs far above China’s near-zero inflation and the nominal exchange rate barely moves, China becomes cheaper in real terms simply by standing still. A currency does not need to fall visibly to deliver a competitive advantage.

But the yuan is only one part of the mechanism. Sobel’s narrower manufacturing calculation puts China’s manufacturing export surplus above 10% of GDP, while the standard overall goods-balance measure is lower. The distinction matters, but so does the direction: China’s goods surplus persisted and grew even as the yuan firmed this year. Appreciation alone therefore has not dismantled the export machine.

The deeper engine is China’s savings and investment structure. Households save heavily for old age and illness, while the financial system is organized to collect and direct those savings. State-owned banks channel them toward state-owned enterprises and favored industries, including artificial intelligence, semiconductors and electric cars. Firms and local governments keep production running to meet growth and employment targets even when domestic demand cannot absorb the output — the condition Chinese officials call “involution.”

The housing bust, low confidence and near-zero inflation hold consumption back. Production keeps expanding. The surplus goes abroad.

That chain does not prove that an undervalued yuan is the primary cause of China’s export pressure. State support, productivity, foreign supply-chain dependence, excess capacity and weak demand may each matter independently. The column establishes a powerful connection between the currency and the growth model, but it does not rank those forces or show that currency appreciation would resolve the underlying industrial distortions. A stronger yuan could squeeze exporters while leaving the savings glut, state-directed lending and demand weakness intact.

Politics limits even the adjustment Beijing might otherwise choose. Wei reports that Xi dislikes a weak yuan because it looks like a loss of face and a sign of weakness. That preference makes depreciation a politically costly way to cushion exporters, even when tariffs create an obvious economic case for it. When President Trump repeatedly retreated from tariff threats — the “TACO” pattern traders identified — pressure eased, the yuan stabilized and exporters brought more dollar earnings home. Wei reports that people inside the People’s Bank of China breathed a sigh of relief.

Yet the movement cannot be reduced to Xi’s psychology. The current-account surplus, a weaker dollar and exporter behavior all supported the yuan’s rise, while the extent of state-bank management remains unknown. Those forces explain why the currency can firm without China abandoning the structure that keeps it cheap.

That is the central contradiction. Beijing can permit gradual appreciation because the yuan begins from an undervalued position, but it has shown no appetite for the policies that would reduce the savings pool, redirect state investment or lift household consumption. The cheap currency is not an accidental flaw in the model. It is one of the model’s useful features.

The unanswered questions are more important than another forecast of the yuan’s next move. Does a feedback loop run from exports to production and employment, from there to confidence and saving, and back to weak domestic demand and further exports? And would structural policies — stronger social protection to reduce precautionary saving, or a genuine shift toward consumption — attack the savings pool that keeps the system tilted outward? Until Beijing answers those questions, Xi’s desire for a stronger-looking yuan will change the pace of adjustment, not the economic structure producing the surplus.

Analytical techniques used in this piece

This analysis applies the methods below. Each links to a short, plain-English explainer you can read and reuse.

Red-Team Assessment
Models a capable adversary probing a plan for the seams they would exploit.
Relationship Mapping
Extracts the network of ties among people, institutions, and entities.
Root-Cause Analysis
Traces a symptom back along its causal chain to the conditions that actually generated it.