Why Huge Surplus Fail to Fuel RMB Appreciation

China posted a record merchandise surplus of USD 1.19 trillion and a decade-high current account surplus of USD 735 billion in 2025. In the first four months of 2026, the trade in goods surplus came in at around USD 351 billion, leading market to forecast a full-year figure of as high as USD 1.4 trillion. Some international media believed that these figures suggest the renminbi is substantially undervalued. Yet the currency has shown little sign of sustained appreciation. From 2025 through the first quarter of 2026, the RMB exchange rate against the US dollar traded between 6.8 and 7.2, with no significant appreciation. Why has the currency failed to appreciate meaningfully despite record trade surpluses over the past two years? The following eight questions unpack this puzzle surrounding China's trade surplus and exchange rate.

How to View the Record Trade Surplus

China's merchandise trade surplus as recorded by customs may overstate the country's real trade balance. Customs trade statistics are compiled based on cross-border shipments and full transaction values, a methodology susceptible to double-counting. By contrast, global value chain (GVC) accounting attributes trade flows according to value added and economic origin, capturing only value genuinely created within an economy. A 2018 study by XING Yuqing found that within Apple's supply chain, China acts primarily as an assembly hub. It earns merely around 6% of the total value through processing and component fees, while the vast majority of the remaining value accrues to suppliers in Japan and the Republic of Korea, as well as US entities that control branding, design, software, hardware, intellectual property and profit margins. Take the iPhone 17 Pro Max 256GB as an example. Its ex-factory price is USD 799, while tear down reviews by iSuppli Corp. and TechInsights Inc. suggest hardware and assembly costs of about USD 408. Under this "Apple supply chain" model, China's exports are overstated by USD 743 during production and shipment, while imports are understated by USD 691 when processed goods are sold domestically. Combined, these statistical distortions significantly inflate China's officially reported trade surplus.

To better account for such activities, the State Administration of Foreign Exchange (SAFE) classifies them as factoryless manufacturing in balance of payments statistics. Based on the above supply chain estimates, and assuming Apple-related activities account for roughly one quarter of China's factoryless trade volume, annual trade in this category stood at USD 270 billion to USD 300 billion from 2022 to 2025. Fueled by robust sales of the iPhone 17, the figure likely surpassed USD 350 billion in 2026. Furthermore, customs export data also include overseas direct investment via equipment, foreign aid, donations and promotional samples, totaling around USD 70 billion annually, which generate no export revenue, hence overstate surplus.

IMF Estimates RMB 18% Undervalued: A Sharp Rally Ahead?

Foreign exchange flows paint a more mixed picture. After the renminbi had trended weaker overall since 2022, it started to rebound from around 7.35 against the US dollar in May 2025 to 6.8 in Many 2026, with depreciation expectations flaring up intermittently. For instance, in March 2026, cross-border payments by domestic entities and individuals recorded a net outflow of USD 32 billion, followed by a net inflow of USD 62 billion in April.

The International Monetary Fund (IMF) has repeatedly misjudged the renminbi's equilibrium exchange rate. Between 2008 and 2011, it kept arguing that the renminbi was significantly undervalued and that China's economy faced severe imbalances. As recently as 2012-2014, the IMF still labeled the currency "moderately undervalued" by 5% to 10%, an assessment that drew broad criticism. However, in 2012, The Economist noted that the IMF had been low to adapt to shifts in China's economic fundamentals, highlighting the steep decline in China's current account surplus as a share of GDP, which tumbled from 10.1% in 2007 to 2.1% in 2013. Finally, the IMF reversed its stance by May 2015, concluding that the renminbi was no longer undervalued. The renminbi then depreciated broadly from August 2015 through 2017, a trend that ran counter to the IMF's earlier evaluations.

Can the IMF's Exchange Rate Models be Flawed

The IMF's equilibrium exchange rate framework comprises three main approaches: current account regression (CA), real effective exchange rate regression (REER), and external sustainability (ES). Under the CA approach, the model estimates the exchange rate adjustments by comparing the equilibrium current account balance with the actual reading. Regardless of the methodology applied, these models drew heavily on backward-looking parameters and may fail to foresee parameter dynamics and often fail to account for forward-looking economic changes, especially shifts in the terms of trade.

China's terms of trade(TOT) have deteriorated sharply in 2026. Customs data show import prices rose 6.2% in the first four months of the year while export prices fell 1.5%. Since April, prices for commodities including oil, gas, nonferrous metals, agricultural products, and semiconductors have continued to climb. On May 20, 2026, the Reuters/CRB Commodity Index hit 516, surging 43% from 360 a year earlier and 38% from its year-start level of 374. Markets expect China's TOT to deteriorate by more than 10% in 2026, or even exceed the 12% decline recorded in 2010, the steepest fall so far this century. Reflecting these headwinds, China's trade surplus fell 5.7% year on year to USD 347.7 billion from USD 368.76 billion in the first four months this year.

China's financial markets also remain less appealing relative to those of the US, Japan, and South Korea. Interest rate differentials have widened steadily. By May 2026, the spread between Chinese and US 10-year government bond yields had widened to roughly 3%, while US 30-year Treasury yields climbed above 5%, exceeding levels seen before the subprime crisis. Meanwhile, semiconductor shares have driven equity markets in the US, Japan, and South Korea to repeated record highs, outperforming Chinese equities in investment returns. This trend is evidenced by the robust take-up of newly launched QDII products in mainland China.

How to Assess RMB Fundamentals Objectively

China's current economic fundamentals have improved over the past two years, but it do not signal sharp appreciation of the renminbi. The country has shifted its policy focus from pursuing rapid growth to prioritizing high-quality development. Economic restructuring, a prolonged property sector downturn, record-low birth rates, imported inflation, and the gradual phase-out of subsidies for consumer trade-in schemes and equipment upgrades are all weighing on growth, while potential output expansion continues to weaken.

At the 2026 annual Two Sessions of the National People's Congress (NPC) and the Chinese People's Political Consultative Conference (CPPCC), China lowered its official economic growth target. For the first time, it implicitly set the lower bound of its growth outlook at 4.5%, a figure below market consensus. Meanwhile, in its April 2026 edition of World Economic Outlook (WEO), the IMF forecasts a year-on-year deceleration of

China's growth rate from 4.4% in 2026 to 3.4% in 2030. By contrast, the IMF revised up US growth projection (from 2.2% and 2.0% to 2.3% and 2.1%) over the next two years. For most emerging market economies, slower economic expansion typically coincides with currency depreciation.

How to View China's Current Ac