Key facts
- EU leaders have identified the undervaluation of China's yuan as a primary driver of the bloc's record trade deficit.
- The EU's trade deficit with China hit a record €359.9 billion in 2025.
- An estimated 20-25 percent undervaluation of the yuan makes Chinese products significantly cheaper in the EU.
- EU officials are considering dialogue with China and monitoring export prices as potential responses.
- Inflation differentials are also cited as a major contributor to the EU's loss of external competitiveness.
European Union leaders are increasingly focusing on the undervaluation of China's currency, the yuan (renminbi), as a significant factor behind the bloc's record trade deficit. The EU's deficit with China reached an all-time high of €359.9 billion in 2025, with all member states experiencing a deficit for the first time. German Chancellor Friedrich Merz stated that an artificially low currency provides an unfair competitive advantage, a sentiment echoed by other EU leaders who are exploring measures to address the imbalance.
A report by the Haut Commissariat à la Stratégie au Plan suggests the yuan is undervalued by an estimated 20-25 percent. While trade surpluses should theoretically lead to currency appreciation, experts like Alicia Ferro Herrera from Bruegel suggest China may be preventing this by holding export revenues in Hong Kong rather than converting them to yuan. This undervaluation, combined with inflation differentials, makes Chinese products approximately 30-40 percent cheaper than European equivalents, according to EU industry assessments.
In response, Merz has proposed initiating a dialogue with China on the currency issue, drawing parallels to historical agreements like the 1985 Plaza Agreement. Conversely, Herrera suggests the EU should closely monitor China's export prices for sector-specific deviations, which could indicate overcapacity and negative price growth. The issue was also a prominent topic at the recent G7 summit, signaling a potential new front in Europe's trade strategy against Beijing.