Sobel estimates real yuan is still down roughly 15% since 2022
Mark Sobel estimates the Chinese yuan is between 20% and 30% undervalued, a finding he reached by running China’s current-account numbers through the International Monetary Fund’s exchange-rate framework, according to an Aug. 4 column in The Wall Street Journal by chief China correspondent Lingling Wei. Sobel, a former senior U.S. Treasury official who spent decades on international monetary policy and later represented the United States at the IMF, is now chief economist at the Official Monetary and Financial Institutions Forum.
The yuan’s undervaluation has consequences: by Sobel’s calculation, China’s manufacturing export surplus alone exceeds 10% of gross domestic product, feeding trade frictions that many economists call “China shock 2.0.”
Sobel’s estimate arrives as the yuan has firmed this year. But he cautions that the real, inflation-adjusted exchange rate remains down roughly 15% since 2022. The mechanism, the column explains, is that when U.S. inflation runs well above China’s near-zero rate and the currency pair does not move, China effectively gains a competitiveness edge each year — standing still, when inflation is near zero, is itself a form of getting cheaper.
The column identifies several forces behind the yuan’s rise this year: the current-account surplus, a weaker dollar as President Trump talked it down, and a slow climb as exporters, sensing Beijing was comfortable with the rise, brought dollar earnings home instead of parking them offshore. Sobel said the herd behavior cuts both ways — exporters hoard dollars when the yuan falls and pile back in when it rises. He also acknowledged that nobody knows how large an effect Chinese state-bank management is having behind the scenes.
China saves an enormous amount, Sobel tells the column — partly because the financial system is structured that way, and partly because households put money aside for old age and illness. State-owned banks funnel those savings into state-owned enterprises and favored industries — artificial intelligence, semiconductors, electric cars — to keep production running whether or not domestic demand is absorbing the output. Much of that output is what Chinese officials now call “involution”: companies and local governments locked in a race to keep factories running long after it stops making economic sense, just to hit growth targets or preserve jobs.
Production collides with weak domestic demand, held back by low confidence, near-zero inflation and the housing bust. The surplus goes to exports.
Wei’s reporting adds a political dimension. Xi Jinping, she writes, dislikes a weak yuan — a soft renminbi feels to the Chinese leader like a loss of face and a sign of weakness he would rather not project to the world. Early last year, right after Trump returned to the White House threatening fresh tariffs, China’s central bank found itself managing a contradiction: officials knew a weaker yuan would cushion exporters against tariffs, just as it had in the first U.S.-China trade war, but they also knew Xi does not like a soft currency.
Then Trump walked back tariff threats repeatedly — the “TACO” pattern, as traders call it — tensions eased, and the yuan stabilized and firmed. Wei reported that she is told people inside the People’s Bank of China breathed a sigh of relief.
Looking ahead, Sobel said he does not expect a dramatic revaluation — just what Beijing has delivered so far: slow, cautious appreciation calibrated to preserve stability. Because the yuan starts from such an undervalued position, he said, Beijing has considerable room to let it rise without hurting competitiveness.
Sobel said Beijing is not showing any appetite to address the high savings, state-directed investment and export dependency that keep the yuan cheap and consumption low. The column concludes that a cheap currency is not a bug in China’s growth model — it is a feature — and that Xi’s personal preference for a stronger-looking yuan is not enough, on its own, to change that.