Preface: this is a follow up article to my recent piece that looked at the latest round of calls for Chinese RMB appreciation, through the lens of the cost composition of the Electric Vehicle sector. That essay showed that when costs include a lot of imported inputs, currency appreciations can actually enhance export competitiveness. If that’s what one sector looks like, what does the higher order ‘macro’ data suggest? Data on Chinese Foreign Value Added confirms the case study conclusions in what is known as the “appreciation paradox”.

Scholarly articles that have explored the dynamics between the RMB’s exchange rate and Chinese exports (and American imports) caution against the simplistic mainstream neoclassic arguments that sit behind much of the current round of appreciation advocacy. I go a little further. As my EV case study argued, appreciation advocates should be careful what they wish for. The ongoing processes of dedollarisation would actually be accelerated by any notable RMB appreciation, with adverse implications for American industries that are specially dependent on imported raw materials, components and capital equipment.

Introduction

China’s trade surplus for the year to date surpassed $1 trillion. This has given rise to a flurry of reactions from assorted commentators (eg., the Financial Times) that China’s renminbi (RMB) is under-valued. The IMF also piled on, calling for Chinese “rebalancing” and an appreciation of the RMB. These hasty reactions expose the limits of western analytics framed by the nostrums of mainstream economics. In fact, prima facie, the fact that the RMB has appreciated over the past 5 years and at the same time, China’s export volume and surplus have not been dented, should suggest - at the very least - a need to suspend unquestioned belief in the mainstream economics nostrums. On this score, note that between December 2024 and December 2025, the RMB has appreciated ~3.3% vis-a-vis the USD, all the while folk are now handwringing about an historic trade surplus.

As I will show in this essay, these advocates for RMB appreciation need to be less hasty, and think twice. Further rapid and large-scale RMB appreciation could backfire badly on western economies, causing further social instability. Instead of demanding further and large-scale RMB appreciation, it’s advisable that assorted western advocates show less haste, as well as a little humility and gratitude that the PBOC values stability and isn’t in the business of sudden moves.

For decades, Western economies, particularly the United States, have pressured China to appreciate its currency, the RMB, as a remedy for perceived trade imbalances. This advocacy, rooted in neoclassical economic theory, posits that a stronger RMB would make Chinese exports more expensive abroad, thereby reducing China’s massive trade surplus and boosting Western competitiveness. Institutions like the International Monetary Fund (IMF) and the U.S. Treasury have echoed this call, framing RMB undervaluation as a distortion that exacerbates global imbalances. As of December 14, 2025, these pressures persist: the IMF’s recent Article IV consultation with China urges a more market-determined exchange rate to shift the economy toward domestic consumption, while the U.S. Treasury’s June 2025 semi-annual report keeps China on its currency Monitoring List, criticising Beijing’s lack of transparency in exchange rate interventions.  

Yet, this narrative overlooks the complexities of China’s integration into global value chains (GVCs), its managed exchange rate regime, and the accelerating internationalisation of the RMB. A critical assessment reveals a profound irony: far from curbing China’s export dominance, a managed RMB appreciation could enhance Chinese firms’ competitiveness by lowering input costs, while imposing inflationary pressures on Western importers, particularly in the U.S.

This essay explores this “appreciation paradox” through three lenses: (1) the mechanics of foreign value added (FVA) in China’s exports, (2) the asymmetric impacts on the U.S. economy, and (3) the strategic role of RMB internationalisation. The dual themes are clear - Western policymakers should be careful what they wish for, as appreciation might not deliver the intended ‘rebalancing,’ and they can be thankful that China’s resistance to date has mitigated potential self-inflicted harm. By resisting rapid appreciation, Beijing has actually shielded Western economies from sharper cost increases in imported goods, preserving what is perhaps a fragile equilibrium in global trade. Western analysts should be grateful.

This analysis draws on empirical evidence from recent studies and data, highlighting how structural differences between China and the West amplify the risks of backfiring. In an era of geopolitical fragmentation and de-dollarisation trends, pushing for RMB strength could accelerate shifts that further undermine Western economic leverage.

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Section 1: The Mechanics of China’s Foreign Value Added and the Appreciation Paradox

China’s export model is deeply embedded in global value chains, where a significant portion of the value in its exports derives from imported intermediates - raw materials, components, and services. This foreign value added (FVA) creates a counterintuitive dynamic: RMB appreciation, which mainstream theory predicts would erode export competitiveness by raising foreign-currency prices, instead provides a natural hedge by cheapening imported inputs in domestic terms. This “paradox” challenges neoclassical assumptions and explains why calls for appreciation risk backfiring, potentially bolstering rather than diminishing China’s trade surplus.

The OECD’s Trade in Value Added (TiVA) database, updated in its 2025 edition, quantifies this integration. For 2022 (the latest comprehensive year), China’s overall FVA in gross exports stood at approximately 20-25%, down from 32.6% in 2009 due to localisation efforts under initiatives like “Made in China 2025.”   However, in key export sectors - electronics (35-42%), machinery (30-37%), and chemicals (25-41%) - FVA remains in the 20-50% range, accounting for 55-65% of total exports. These sectors, comprising about 60% of China’s $3.4 trillion in goods exports in the first 11 months of 2025, rely heavily on upstream imports from Taiwan, South Korea, Japan and Australia.  For instance, in electronics, imported semiconductors and components form a substantial cost base, with indirect FVA (multi-stage GVC effects) constituting about 70% of the total.

When the RMB appreciates, the cost of these foreign-denominated inputs falls in RMB terms, allowing Chinese exporters to maintain or even lower their foreign-currency prices. Empirical studies underscore this incomplete exchange rate pass-through (ERPT). A 2015 firm-level analysis in a study published in the Journal of International Economics by Hongbin Li et al., using data from 2000-2007, found that a 10% RMB appreciation reduces export volumes by only 2.2-4.1%, with nearly complete pass-through to foreign prices, preserving competitiveness.  More recent work, such as that by Chen et al. (2023), published in Asia Economic Journal, confirms declining elasticities over time, with high-FVA products showing even greater resilience. In processing trade - where firms import intermediates for re-export - appreciation acts as a cost subsidy, offsetting revenue losses.

This mechanic flips the neoclassical script. Under the Marshall-Lerner condition, appreciation should widen import demand and narrow exports if elasticities exceed unity. For China, however, low export volume elasticities (often below 0.5) and high import sensitivity (due to FVA) mean the trade balance may remain stable or even improve. Garcia-Herrero and Koivu’s 2009 Bank of International Settlements study and 2010 CEPR study showed appreciation reduces both exports and imports, with the latter falling more in GVC-heavy sectors.  Florent Bouvet et al., in a study published in China Economic Review (2017) highlight that processing-trade firms, dominant in high-tech exports, exhibit lower ERPT to costs, enabling margin preservation.

Western calls for appreciation, such as those in the IMF’s 2025 Article IV report - which projects China’s current account surplus at 3.3% of GDP and attributes imbalances partly to real depreciation from deflation - ignore this hedge.  The PBOC’s managed regime, detailed in its Q2 2025 Monetary Policy Report, emphasises stability via daily central parity fixes and ±2% bands, allowing gradual appreciation without shocks.  A hypothetical 5% managed rise over 12 months could cut input costs by 1-2% in high-FVA sectors, muting volume drops to 1-2% while sustaining surpluses.

Critically, this paradox means appreciation might not rebalance trade as intended. Instead, it could accelerate China’s shift to higher-value production, reducing FVA further and entrenching dominance. Western economies, assuming a zero-sum erosion of Chinese exports, risk wishing for a policy that strengthens Beijing’s hand. China’s resistance - holding the RMB at around 7.05 per USD as of late 2025 - has prevented sharper input cost relief for its firms, indirectly capping surplus growth and affording the West breathing room amid supply chain vulnerabilities.

China’s export model, especially processing trade (assembling imported components into finals for re-export), means a large share of costs are denominated in foreign currencies. RMB appreciation lowers these input costs in RMB terms, allowing exporters to:

• Maintain or even reduce foreign-currency export prices (high exchange rate pass-through to buyers abroad).

• Preserve profit margins without sharp volume drops.

• In high-FVA sectors (e.g., electronics, ~35-40% foreign content), this can fully or partially neutralise the competitiveness loss.

Empirical studies consistently show:

• Low export volume elasticity: A 10% RMB appreciation typically reduces export volumes by only 2-4% (far below elasticities in many other countries);

• High pass-through to export prices: Chinese exporters pass on much of the cost savings, keeping prices competitive abroad; and

• Imports fall with appreciation: Reduced export production lowers demand for imported intermediates, contracting imports more than exports in some estimates.

In summary, FVA mechanics reveal appreciation as a double-edged sword: a tool for Western rebalancing that could inadvertently assist Chinese exporters. Western policymakers should heed this, as unchecked advocacy might hasten the very imbalances they seek to address.

Section 2: Asymmetric Impacts: Why RMB Appreciation Hurts U.S. Firms More Than It Helps

While China’s FVA provides a buffer against RMB appreciation, the U.S. economy lacks similar protections, creating an asymmetry that amplifies the risks of backfiring for Western interests. U.S. advocacy for a stronger RMB, intended to boost domestic manufacturing by making Chinese imports costlier, overlooks how depreciation of the USD (the flipside) raises U.S. input costs without offsetting benefits. This dynamic could fuel imported inflation, widen trade deficits, and disadvantage U.S. firms in global competition - making appreciation a pyrrhic victory at best.

The U.S. economy’s structure exacerbates this vulnerability. Unlike China’s export-oriented model with high FVA, U.S. exports have domestic content of 85-90%, but imports - particularly intermediates and capital goods - are critical for manufacturing. In 2025, U.S. imports from China total around $500 billion annually, dominated by electronics, machinery, and critical minerals where China holds market dominance.  A USD depreciation (or RMB appreciation) directly inflates these costs, with near-complete pass-through for commodities. Studies like Cavallo et al. (2021) show that in GVCs, Chinese exporters absorb shocks by passing on savings, keeping USD prices stable, while U.S. importers face unmitigated hikes. 

Empirical evidence from past episodes illustrates this. During the 2005-2008 RMB appreciation of 21%, U.S. imports from China rose 39%, while exports to China grew 71%, but the bilateral deficit widened, as cheaper Chinese inputs didn’t translate to proportional U.S. gains. In another study, Miaojie Yu (2009) from China Center for Economic Research, National School of Development, Peking University, found RMB strength reduced China’s U.S. exports modestly but had negligible impact on overall volumes due to absorption.  For the U.S., higher import prices squeezed margins in sectors like autos and tech, contributing to “imported inflation.” In the 2025 context, with RMB up 3% year-to-date against the USD, U.S. firms report cost pressures amid tariffs and restrictions on critical materials like rare earths.

This asymmetry stems from differing ERPT. Chinese firms, with high FVA, exhibit high pass-through to buyers (maintaining competitiveness) and low to costs (absorbing gains). U.S. firms, reliant on imports without equivalent hedges, pass costs domestically, eroding purchasing power. The U.S. Treasury’s June 2025 report, refraining from a manipulator label but blasting China’s opacity, pushes for appreciation without addressing this.  Yet, as Marquez and Schindler note in their 2007 paper in the Review of International Economics, even a 10% appreciation might cut China’s global export share by just 0.5%, while raising U.S. import bills significantly. 

Broader implications include deficit persistence and inflation risks. The IMF’s 2025 projections warn of China’s surplus widening to 3.3% GDP, partly from weak domestic demand, but appreciation could contract U.S. imports less than expected while boosting costs.  In a Fed easing cycle, this could complicate monetary policy, as seen in prior yuan strength episodes. Geopolitically, U.S. tariffs - escalating under the current administration - compound this, but appreciation would add unhedged pressure without resolving surpluses.

Critics argue U.S. manufacturing revival requires domestic reforms, not currency tweaks. Brookings analyses highlight that RMB undervaluation boosts Chinese exports but also attracts U.S. investment outflows - appreciation might reverse this modestly but at the cost of higher consumer prices.  China’s resistance, via PBOC tools like swap lines and fixes, has capped these effects, allowing U.S. firms gradual adjustment. Thankfulness is due: without it, sharper appreciation could have accelerated inflation post-2022, amid supply shocks.

In essence, U.S. issues reveal appreciation as a blunt instrument that harms importers more than it curbs Chinese exports. Western economies would be well-advised to reconsider their RMB appreciation advocacy, recognising that China’s restraint has preserved stability in bilateral trade. The same dynamics apply to the EU, incidentally, so the folk in Brussels would be well-advised to take a breath before jumping on the “RMB must appreciate” bandwagon.

Section 3: RMB Internationalisation: Strategic Insulation and the De-Dollarisation Edge

The accelerating internationalisation of the RMB adds a strategic dimension to the appreciation paradox, enabling China to insulate key markets from exchange rate fluctuations while enhancing competitiveness. As RMB settlements surpass 50% of cross-border transactions in 2025, a managed appreciation could protect trade with the Global South, leaving Western importers exposed and accelerating de-dollarisation trends. This evolution underscores why Western calls risk backfiring, potentially diminishing USD hegemony without rebalancing trade.

RMB internationalisation, propelled by PBOC policies and infrastructure like CIPS, has surged amid geopolitical tensions. In H1 2025, RMB accounted for 53% of China’s cross-border receipts and payments, up from lower levels pre-2020, with trade settlements at 40-54%.   SWIFT data shows RMB at 3.5% of global payments in April 2025, overtaking some currencies, which of course doesn’t capture the growing volume of non-SWIFT tracked transactions. Adoption is highest with BRI partners: over 90% in Russia-China trade, 77% of ASEAN firms preferring RMB for China dealings, and growing in Middle East energy contracts. 

In an appreciation scenario, this insulates RMB-settled exports: buyers pay fixed RMB amounts, avoiding price hikes, while exporters receive stable revenues. For Global South markets - now a faster-growing export segment amid U.S. tariffs - appreciation becomes neutral or beneficial, as lower input costs (from FVA) allow margin boosts without alienating partners.

Conversely, USD-denominated trade (U.S./EU) faces hikes, reducing U.S. purchasing power without symmetric gains. Studies like Bernard et al. on Chinese exporters’ currency exposure show firms hedge via RMB invoicing, minimising risks. The PBOC’s Q2 2025 report affirms market-driven flexibility alongside stability, enabling strategic appreciation. his de-dollarisation edge amplifies backfiring risks. The IMF’s Georgieva urged RMB flexibility in December 2025, but such moves could hasten non-USD recycling, raising U.S. borrowing costs.  Asia Society reports note RMB promotion diversifies settlements with sanctioned partners, eroding USD dominance. 

China’s resistance has slowed this shift, allowing Western economies time to adapt. Thankfulness is warranted: rapid internationalisation under appreciation pressure might have fragmented global finance sooner. Ultimately, RMB internationalisation turns appreciation into a strategic tool for China, insulating allies while pressuring the West. Policymakers should pause advocacy, lest it accelerates undesired shifts.

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Section 4: Asymmetric Impacts - Tailored Help for China, Pain for the US

A managed 5% RMB appreciation would amplify the “paradox” we’ve discussed:

• For China, such an appreciation would cheapen imported inputs by ~5% in RMB terms, providing a ~1-2% boost to margins in high-FVA sectors (electronics and machinery - ~50% of exports). Export volumes might dip modestly (1-2%), but price competitiveness abroad holds via high pass-through, sustaining the trade surplus while easing deflationary pressures and encouraging consumption.  This aligns with PBOC goals of high-quality growth without shocking markets.

• As for the US, no such hedge - USD imports from China (e.g., electronics, machinery and critical minerals) would rise ~5% in dollar terms, fuelling “imported inflation” in manufacturing and consumer goods. With U.S. FVA low (~10-15%), firms like automakers or tech assemblers face unmitigated cost hikes, potentially widening the trade deficit short-term and pressuring the Fed amid its easing cycle.

• For Global South markets, they would be largely insulated. With more trade settled/invoiced in RMB (especially exports to BRI/Global South partners), buyers pay in RMB and, as such, there would be no direct FX impact from appreciation (they face stable RMB prices). Further, Chinese exporters receive fixed RMB amounts, and are consequently fully hedged against appreciation eroding revenues. This “inures” these markets from fluctuations, preserving demand and market share without price hikes for buyers.

The RMB’s rising role in settlements - especially with the Global South - gives the PBOC more “strategic space” for appreciation: It could comply with external pressures (e.g., IMF/US calls) while turning it into a net positive for Chinese competitiveness and rebalancing toward consumption. This selective de-dollarisation reinforces the paradox, quietly shifting advantages amid fragmentation. However, full insulation is incomplete (USD is still dominant in many chains), and sharp moves risk capital flows; in the context, stability remains the PBOC’s priority.

In essence, the PBOC could treat this as a “win-win” for Beijing: complying with external calls while leveraging GVC structure for internal gains. However, execution hinges on domestic priorities; stability trumps all, so a sharp or uncoordinated move remains unlikely. If trade tensions escalate (e.g., new tariffs), it might even prompt the opposite: subtle depreciation resistance. This managed path could quietly reshape the asymmetry further in China’s favour.

Conclusion

As of December 2025 the RMB has actually appreciated ~3% against USD year-to-date in 2025, contributing to input cost relief amid global pressures. Yet, China’s exports have continued to grow and the surplus has reached a record $1 trillion for the year to date. Strong export growth despite occasional RMB strength, supported by cost advantages in GVC-heavy sectors, confirms that simplistic notions of currencies and trade balances don’t hold when supply chains are complex.

FVA remains ~20-30% overall (higher in key exports like electronics/machinery), though declining due to localisation efforts. Yet, while appreciation does exert downward pressure on exports (contrary to a full “improvement”), the input cost channel makes the negative impact far smaller than mainstream theory predicts for a typical economy - often negligible on volumes and modest (or even positive) for price competitiveness in import-dependent sectors. This is why calls for sharp RMB revaluation to curb China’s surplus have historically had limited bite. The paradox remains.

The calls for further RMB appreciation, steeped in neoclassical ideals, risk backfiring by leveraging China’s FVA hedge, imposing U.S. cost burdens, and advancing RMB internationalisation. Western economies can be thankful for Beijing’s resistance to date, which has tempered these effects, and for the PBOC’s preference for maintaining stability. The message is clear for those in the west clamouring for RMB appreciation: be careful, very careful, what you wish for.