European Union leaders are increasingly pointing to China's management of the yuan as a key driver behind the bloc's record-high trade deficit, which reached €359.9 billion in 2025. For the first time, every EU member state—including Germany, the bloc's largest economy—recorded a deficit with Beijing. European Commission President Ursula von der Leyen described the situation as "simply not sustainable."
The issue took center stage at the European Council summit on 19 June, where German Chancellor Friedrich Merz argued that "an artificially low currency is an advantage for those who want to improve their economic competition positions." The matter also featured prominently at the G7 summit in France last week, signaling a new front in Europe's trade battle with China.
Why the Yuan Matters
According to a report by the Haut Commissariat à la Stratégie au Plan, a French government advisory body, the yuan (or renminbi) is undervalued by an estimated 20-25%. While no universally accepted method exists to measure currency misalignment, the report notes that "the assessment that the renminbi is significantly undervalued is now widely shared, including among international institutions."
In theory, China's persistent trade surpluses should create demand for the yuan, pushing its value higher. But that has not happened. Alicia Ferro Herrera, an expert at the Brussels-based think tank Bruegel, explains that Beijing prevents the yuan from appreciating by not repatriating all its export revenues. "They stay in Hong Kong and they are not converted into RMB," she told Euronews.
The undervaluation gives Chinese exports a major price advantage. EU industry estimates that Chinese products are 30-40% cheaper than their European equivalents. However, Ferro Herrera cautions that the inflation differential also plays a significant role: "My estimate is that the inflation differential and its accumulation in Europe since the invasion of Ukraine explains about three quarters of the loss in external competitiveness."
What Brussels Can Do
Merz has suggested that the EU open a dialogue with China on currency issues, drawing a parallel to the 1985 Plaza Agreement. That accord saw the US, Japan, West Germany, the UK, and France agree to depreciate the US dollar against the yen and the Deutsche Mark to head off protectionist pressures. Merz also referenced the European Monetary System, which used exchange-rate bands to limit currency fluctuations before the euro. "That was a system where countries could coordinate through exchange-rate corridors," he said.
Yet Ferro Herrera notes that the US did not push for similar negotiations during the G7 discussions on economic imbalances. Meanwhile, the EU is already developing internal tools. As reported by European Pulse, the bloc is creating a diversification tool to reduce its reliance on Chinese imports and address the unsustainable trade deficit.
The challenge is compounded by the fact that the yuan's undervaluation is not solely a matter of central bank intervention. It reflects a broader economic strategy that keeps Chinese goods competitive globally. For European manufacturers, this means facing a structural disadvantage that no single policy can easily fix.
As the EU weighs its options, the debate over currency management is likely to intensify. Whether through bilateral talks, multilateral coordination, or internal diversification, Brussels must navigate a complex landscape where trade imbalances, inflation, and geopolitical tensions intersect.
