China's projected $1.2 trillion surplus prompts call for new Plaza Accord

Yuan estimated 19% to 35% undervalued ahead of finance ministers’ meeting

Goldman Sachs projects China’s 2026 trade surplus will reach $1.2 trillion, with the country’s current-account surplus heading toward 1% of global GDP — a share the bank’s economists say no country has achieved in postwar history. German Chancellor Friedrich Merz called in June for a new international currency accord aimed at lifting the yuan. Wall Street Journal chief economics commentator Greg Ip argues in a published column that coordinated action — modeled on the 1985 Plaza Accord that weakened the dollar against the Japanese yen and the West German mark — may be the only effective response. Central bank governors and finance ministers from the world’s top 20 economies are scheduled to begin meeting this weekend in Asheville, North Carolina.

The case for action rests on two figures that Goldman Sachs and other economists have published but that they read differently. Goldman Sachs estimates the yuan is undervalued by 19% relative to fundamental determinants such as the trade balance and purchasing power. Brad Setser, a scholar at the Council on Foreign Relations, puts the undervaluation at 35%. Both agree on the trade imbalance. They disagree on the diagnosis.

Goldman Sachs economists Kamakshya Trivedi and Hui Shan documented in a recent report, cited by Ip, that Chinese goods prices have fallen since the pandemic while prices in developed markets rose — the result of Chinese lockdowns and the property bust on one side and stimulus and supply-chain disruptions on the other. The inflation-adjusted yuan exchange rate has accordingly fallen. The economists compared costs for manufacturers operating in China — New Balance in shoes, Tesla in electric vehicles — with costs elsewhere, and compared Chinese appliance maker Haier’s prices with those of Germany’s Siemens. China’s price discount stands at 32% in electric vehicles, 38% in refrigerators, and 53% in shoes, according to their analysis.

The International Monetary Fund and most orthodox economists argue that the undervalued yuan is not the cause of China’s current-account surplus but a symptom of inadequate domestic demand. The surplus reflects the difference between how much a nation saves and how much it invests, the IMF says; China’s surplus reflects excessive household saving, while the U.S. deficit reflects insufficient saving. The IMF attributes the excess saving to structural factors — an inadequate safety net, a fiscal system that taxes households heavily and depresses their consumption, and a collapsed property bubble that has shriveled investment. Its prescription: “Fiscal stimulus should be focused on durably boosting consumption by investing in people” and arresting the property bust.

Michael Pettis, a China expert affiliated with the Carnegie Endowment for International Peace, holds the alternative view. A cheap yuan, in his account, lowers Chinese prices abroad and raises foreign prices in China, boosting the surplus. It also shifts “income between consumers of tradable goods and producers of tradable goods,” funneling income and investment toward export industries and away from consumers. The undervalued currency, Setser argues, takes the pressure off China to reform because it sustains exports while the rest of the economy is moribund.

Chinese leader Xi Jinping has signaled little appetite for rebalancing. Xi disparages support for households as “welfarism,” according to Ip. Xi also believes, Ip writes, that boosting exports while restricting imports makes the world more dependent on China and China less dependent on the world. The Global Times, a mouthpiece for the Chinese Communist Party, said in June that “China will not accept using exchange rates as a pretext for oppression, nor will it return to the old era of great powers coordinating the fate of a few countries.”

The 1985 Plaza Accord offers the closest historical model. Under it, the U.S. and its allies combined joint intervention in currency markets with domestic reforms — including a narrower U.S. budget deficit — to push the dollar down against the West German and Japanese currencies. The U.S. trade deficit first widened and then shrank sharply. The 1985 signatories were close American allies; China, Ip notes, is not, and is in no mood to cooperate.

European frustration has reached the public record. A French government report in February said, according to Ip, that “this Chinese surge now threatens…the very core of Europe’s productive system.” The same report proposed “unprecedented trade protection, equivalent to a general tariff of 30% vis-à-vis China; or a depreciation of the euro of 20% to 30%” against the yuan. Merz’s June call for a new Plaza Accord added to that pressure.

China’s tight control over access to its currency prevents foreign governments from simply buying yuan to force it higher, Ip notes. The lever that worked once was tariffs: in 2005, Beijing began a significant yuan revaluation under the threat of tariffs moving through Congress. Ip suggests that approach again — tariffs imposed with a promise to dial them back if China revalues.

Political obstacles to such coordination are formidable. President Trump favors tariffs and may not be willing to trade them for currency appreciation, Ip writes, and has shown little interest in deficit reduction. Other countries are divided and reluctant to antagonize China, and are not disposed to cooperate with Trump after being hit with his tariffs. The finance ministers’ meeting in Asheville, Ip concludes, would be a “good place to start the conversation” — and a currency accord, with or without China’s cooperation, could be “the cleanest, least distorting and most effective solution” to a problem the U.S. and its allies share.