Stronger yuan puts Chinese exporters under pressure

China is facing a growing currency dilemma as the yuan’s recent appreciation puts increasing pressure on exporters, while international economic partners continue to argue that the currency remains undervalued.

The strengthening yuan has made Chinese products more expensive for overseas buyers, reducing the already narrow profit margins of manufacturers and raising concerns about export orders, business operations and employment.

Chinese garment exporter Chen Lifeng, who runs Ningbo Tengsheng Garments in eastern Zhejiang province, said the currency’s recent gains had significantly affected his company’s ability to compete in European markets. He warned that continued appreciation could leave his business unable to survive.

The situation highlights a difficult challenge for Beijing. European leaders and International Monetary Fund officials believe China’s currency remains undervalued, giving its exporters an unfair competitive advantage in international markets. However, Chinese policymakers are concerned that allowing the yuan to strengthen too quickly could undermine manufacturing, threaten jobs and weaken economic growth.

China continues to rely heavily on exports as domestic demand remains subdued. Manufacturers are already facing intense competition and limited profitability, making currency appreciation an additional burden.

According to the report, the yuan has gained nearly 5 per cent against the US dollar and around 9 per cent against the euro this year. China’s central bank, however, maintains that the country’s record trade surpluses are primarily the result of industrial upgrading and improved manufacturing capabilities rather than deliberate currency manipulation.

The People’s Bank of China (PBOC) has already signalled concern over the pace of the yuan’s appreciation. On Tuesday, the central bank announced an increase in the foreign currency reserve requirement for financial institutions, a move widely seen as an attempt to discourage further rapid gains in the currency.

Analysts believe Beijing could introduce additional measures if the yuan continues to strengthen. These may include adjusting daily exchange-rate reference levels, encouraging banks to manage currency transactions, easing restrictions on overseas investments and introducing measures to make betting on a weaker dollar less attractive.

However, economists do not expect China to make a dramatic shift in its currency policy. Instead, authorities are likely to take gradual steps to prevent excessive appreciation while avoiding further tensions with major trading partners.

The pressure is particularly severe for labour-intensive industries, including textiles, clothing and household appliances. These businesses generally operate on narrow margins and have fewer opportunities to absorb higher production costs or currency-related losses.

Financial data also indicates that profitability remains weak across China’s manufacturing sector. A Reuters analysis of 5,209 Chinese-listed companies with market values exceeding $100 million found that their median net profit margin stood at 4.9 per cent in the first half of the year. This compared with 8.9 per cent among 9,733 international competitors.

Strategic industries, including electric vehicles, batteries, solar and wind equipment, and semiconductors, are also experiencing limited profitability. A separate study by Natixis estimated that profit margins in these sectors were around 2 per cent.

Economists warn that further currency appreciation could force manufacturers to reduce production, cut jobs or increase prices to protect their earnings. Such measures could also affect household spending and weaken domestic consumption.

Standard Bank estimates that every 1 per cent increase in the yuan’s real effective exchange rate could reduce average export profit margins by approximately 30 basis points. The measure accounts for inflation and the yuan’s value against the currencies of China’s trading partners.

The debate has also drawn attention to China’s broader trade relationship with Europe and the United States. The International Monetary Fund estimated in July that the yuan was undervalued by between 17.3 and 25.3 per cent. German Chancellor Friedrich Merz put the estimated undervaluation at between 25 and 30 per cent.

Although the yuan has strengthened since those assessments, data from the Bank for International Settlements showed that its real effective exchange rate remained around 14 per cent below its March 2022 peak in September.

Western policymakers have increasingly described the expansion of China’s advanced manufacturing exports as a new wave of competitive pressure on international industries, sometimes referred to as ‘China Shock 2.0′.

Beijing, however, rejects accusations that it deliberately keeps its currency weak to support exports. The Chinese central bank maintains that the exchange rate is largely market-driven and that the yuan is fairly valued under other economic assessments.

Economists remain divided over the best approach to addressing China’s trade imbalances. Some argue that a stronger yuan alone would not resolve the problem without a corresponding increase in domestic consumption. They warn that excessive appreciation could deepen deflationary pressures by making Chinese exports less competitive.

Others believe a stronger currency could improve Chinese households’ purchasing power by making imported goods cheaper and encouraging a more balanced economy.

Meanwhile, manufacturers continue to face pressure from rising compliance costs, intense domestic competition and weakening profit margins. Business owners say they may have to absorb part of the currency-related losses, use cheaper materials or negotiate price increases with overseas customers.

The growing disagreement over the yuan reflects a broader economic challenge for China: balancing international demands for a stronger currency against the need to protect exporters, manufacturing jobs and economic growth.