European leaders are increasingly concerned about the undervaluation of the Chinese yuan and its impact on the European Union's surging trade deficit with China. The deficit reached a record high of €359.9 billion in 2025, with all EU member states, including Germany, experiencing a trade deficit with Beijing for the first time that year. This imbalance is attributed partly to the yuan's undervaluation, which makes Chinese products more competitive and up to 30-40% cheaper than European equivalents, exacerbating the EU's trade woes.
Deutsche Bank strategists reported that the yuan is still approximately 15% below its fair value against the Euro, a slight improvement from 20% a year ago but still a significant competitive advantage for Chinese exports. Rabobank's Michael Every noted that German Chancellor Merz believes the CNY is 20-30% undervalued and called for a more freely floating currency. However, efforts to achieve a "Plaza Accord-style deal" with China are unlikely to succeed, as China is not expected to accept such an arrangement.
European Central Bank President Christine Lagarde emphasized the need for China's inclusion in any G7 talks regarding currency valuations to address these imbalances. While some experts, like Alicia Garcia-Herrero from Bruegel, suggest that the undervaluation is not solely due to central bank intervention but also China's practice of retaining export revenues outside the mainland, Chancellor Merz proposed dialogue with China on its monetary and FX policy to foster fairer competition. The EU is contemplating measures, including potentially following the US in tariff implementation, if the trade surplus issues are not resolved soon.
