China’s Currency War Against the West

How long can Western economies last when the world’s biggest exporter has artificially cheap currency?

An employee works on a computer at the Alipay reception of the Shanghai office building of Ant Group in China on Aug. 28, 2020. Hector Retamal/AFP via Getty Images

Commentary

For decades, China’s economic rise has rested on a simple formula: export aggressively, import selectively, and maintain a currency regime that supports manufacturing competitiveness. Although Beijing insists that the renminbi, or yuan, is managed responsibly, growing evidence suggests that China’s currency policies continue to provide substantial advantages to its export sector while contributing to economic imbalances and long-term decline in the United States and Europe.

The question is no longer whether China’s currency management affects global markets, but how long the West can absorb the consequences.

The Managed Yuan

Unlike the U.S. dollar or the euro, the yuan does not trade freely. The People’s Bank of China manages its value through daily reference rates, capital controls, intervention in foreign exchange markets, and restrictions on capital movement. This allows Beijing to influence the currency’s value in ways unavailable to most advanced economies.

The International Monetary Fund recently noted that China’s low inflation relative to trading partners has contributed to a real depreciation of the yuan, supporting exports and expanding China’s current account surplus.

Multiple analysts have argued that the yuan remains significantly undervalued relative to China’s economic fundamentals. Goldman Sachs estimated that the currency could be undervalued by as much as 25 percent on a trade-weighted basis.

The practical effect is straightforward. A weaker yuan makes Chinese exports cheaper and more competitive in foreign markets while making imports relatively more expensive inside China.

The Cost to America

The United States has spent decades running large trade deficits while China has accumulated enormous trade surpluses. Beijing’s export-oriented model has helped hollow out portions of America’s manufacturing base while increasing U.S. dependence on Chinese supply chains.

China’s goods trade surplus exceeded $1 trillion in 2025, an unprecedented figure for any nation.

At the same time, Washington continues to run enormous federal deficits. The result is a dangerous combination: America consumes, borrows, and imports, while China produces, saves, and exports.

Many economists would argue that the cause of such an imbalance is more complex than currency valuation alone. That is true. But an undervalued yuan unquestionably magnifies the imbalance by providing Chinese exporters with an enduring pricing advantage.

Europe Faces the Same Threat

Europe increasingly finds itself confronting the same challenge.

Weak domestic demand inside China has encouraged manufacturers to seek growth overseas. European officials have repeatedly expressed concern that Chinese industrial overcapacity is being exported into global markets, placing pressure on local industries and employment.

As Chinese exports continue to grow, European manufacturers must compete not only against lower labor costs and state support, but also against a currency regime that many analysts believe remains undervalued relative to economic fundamentals.

For heavily indebted Western governments already struggling with fiscal deficits and slowing growth, the challenge becomes even more acute.

Gold and Beijing’s Long-Term Strategy

Although the yuan is not backed by gold, Beijing has spent years increasing its official gold holdings while encouraging the growth of China’s gold-trading infrastructure. The People’s Bank of China has reported steady increases in official gold reserves, reaching record levels in recent years. At the same time, Beijing has expanded the role of the Shanghai Gold Exchange and launched initiatives intended to increase China’s influence in global bullion markets.

China has also encouraged broader international use of the yuan in trade settlement, cross-border payments, and financial transactions. State-owned enterprises have been instructed to prioritize yuan-denominated transactions where possible.

The strategic logic is difficult to miss. Beijing appears determined to reduce dependence on the dollar-based financial system while increasing global demand for yuan-denominated assets.

Yet a contradiction remains.

The Contradiction at the Center of China’s Strategy

China wants the yuan to become a major international currency, but it also wants to preserve the export advantages that come from a relatively weak exchange rate.

Those goals are not entirely compatible.

Global reserve currencies typically require deep, open, transparent capital markets and relatively free convertibility. Yet Beijing continues to maintain extensive capital controls and a tightly managed exchange-rate regime.

Despite years of internationalization efforts, the yuan still accounts for less than 2 percent of global reserve holdings, while the dollar remains dominant at more than 56 percent.

A Contest—or Conquest—Decades in the Making

China’s leaders understand that economic power ultimately rests on monetary power. Their strategy appears designed to strengthen China’s financial position gradually while avoiding the economic disruption that could result from a rapidly appreciating currency.

So far, the West has shown that it is unwilling or incapable of resisting Beijing’s currency policy, which poses an existential threat to Western economies.

What is clear is that Beijing has no intention of surrendering the advantages that have fueled its export-driven rise. As the United States and Europe wrestle with debt, deficits, and industrial decline, China’s managed currency regime remains a powerful tool.

In the global geopolitical contest between the United States and China, Beijing continues to leverage its artificially low currency value to distort global trade balances, capital flows, gold accumulation, and monetary influence to its strategic advantage, seemingly without consequences.

Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times.