China's yuan undervaluation fuels euro zone trade deficit, German study shows

A study by the German Economic Institute alleges China is manipulating its yuan to maintain an artificially weak exchange rate against the euro, despite significant cost shifts, leading to artificially low Chinese prices. This undervaluation pressures European companies, contributing to deindustrialization as they source intermediate goods from China, and has resulted in a real appreciation of the euro against the yuan by over 40% since early 2020, deepening the euro zone's trade deficit. These findings emerge as EU leaders prepare for a summit in Beijing to address ongoing trade disputes.

Analysis

A German Economic Institute (IW) study alleges that China is engaging in currency manipulation, maintaining a stable yuan-euro exchange rate despite significant underlying economic shifts. Since early 2020, producer prices in the Eurozone have surged while remaining flat in China, yet the nominal exchange rate has not adjusted, leading to a real appreciation of the euro against the yuan by over 40%. This discrepancy, which the study's author attributes to non-transparent central bank intervention, is deepening the Eurozone's trade deficit with China. The resulting artificially low costs for Chinese goods are pressuring European companies to source intermediate goods from China, a trend the study links to continental deindustrialization and a loss of market share for firms that do not. These findings surface as EU leaders prepare for a high-level summit in Beijing to address trade disputes, echoing recent U.S. warnings about China's lack of transparency in its exchange rate policies.

Key Decisions for Investors

• Investors should re-evaluate exposure to European industrial and manufacturing companies, particularly those competing with Chinese imports, as the reported yuan undervaluation creates significant margin pressure and a competitive disadvantage.
• Closely monitor the upcoming EU-China summit for any developments on currency and trade policy, as a forced appreciation of the yuan or new trade barriers could abruptly alter the profitability of European importers and exporters.
• Assess supply chain concentration risk within portfolio companies, as a heavy reliance on artificially low-cost Chinese intermediate goods, while beneficial short-term, signals vulnerability to geopolitical tensions and potential future trade disruptions.