The RMB can appreciate significantly.

Source: Published in Hong Kong Economic Journal

The Renminbi (RMB) has significant room for appreciation. Here are two simple examples: the Hong Kong dollar is pegged to the US dollar, and all Hong Kong residents know that shopping and spending in Shenzhen is at least half as cheap as in Hong Kong. The Economist in the UK sometimes publishes the “Big Mac Index” comparing the exchange rates of various currencies to the US dollar. A McDonald’s Big Mac burger sells for $5.69 in the US, but only 22.6 RMB (about $3.18) in China. This means that the RMB would need to appreciate to nearly 4 to 1 against the US dollar to achieve purchasing power parity, implying the RMB is undervalued by about 44%.

Of course, the “Big Mac Index” is a somewhat humorous and rough estimate. The International Monetary Fund (IMF) officially estimates the RMB’s purchasing power parity index at 2.04, meaning the RMB is undervalued by about 50% relative to the US dollar. Although scholars debate the extent to which the RMB’s exchange rate reflects its true value, it is undeniable that the gap between its exchange rate and purchasing power is the most significant among the world’s major currencies.

In 2024, China’s GDP was 13.5 trillion RMB (about $19 trillion), accounting for 65% of the US GDP ($29 trillion). However, calculated by purchasing power parity, China’s GDP reaches $38 trillion, surpassing the US by 31%.

Therefore, if the RMB appreciates by 50% against the US dollar over the next five years, reducing its current undervaluation by half to 25%, not only is there fundamental support for this, but it would also benefit China in multiple ways: steady appreciation would align the RMB more closely with its purchasing power, increase the wealth effect for households, boost consumption, and, in the context of rising trade protectionism in the international market, help China improve relations with its trading partners.

Moreover, China’s nominal GDP surpassing that of the US is of great strategic significance. The various measures the US takes to contain China’s rise are aimed at maintaining its status as the world’s largest economy in nominal terms. Once China’s economic scale exceeds that of the US when measured in US dollars, US efforts to suppress China would lose their rationale, and Sino-US relations could fundamentally improve. Since China’s population is four times that of the US, even if China’s GDP matches the US, its per capita GDP would still be just a quarter of the US, meaning China’s economic growth still has enormous potential.

Generally, floating exchange rates automatically adjust a country’s balance of payments. When there is a deficit, the currency depreciates, making exports cheaper and imports more expensive, thus reducing the deficit. Conversely, a surplus causes the currency to appreciate, producing the opposite effect. However, China has maintained a current account (trade and services) surplus for 32 consecutive years (1994–2025), with the surplus far exceeding the capital account deficit, resulting in foreign exchange reserves accumulating to $3.3 trillion.

Logically, these fundamentals should drive RMB appreciation. But why is the actual exchange rate still significantly undervaluing the RMB? This likely reflects market skepticism about China’s economic outlook and expectations regarding the central bank’s intentions, rather than a lack of fundamental support.

It is difficult for any central bank to counter market trends and dictate exchange rates, but it can guide market expectations in line with fundamentals, gradually moving the currency toward its intrinsic value. There are precedents in China’s history of reform and opening up. In 1993, the unofficial market exchange rate once reached 11 RMB to 1 USD (the official rate was 5.8). On January 1, 1994, the People’s Bank of China unified the exchange rate at 8.7 RMB to 1 USD (which was a devaluation against the official rate, but an appreciation against the unofficial rate). This was achieved thanks to the central bank’s guidance—sending a strong signal of determination to the market, rather than using foreign reserves to support the RMB. As a result, not only did reserves not decline, but they soared, rising 2.4 times from $21.2 billion at the end of 1993 to $51.6 billion at the end of 1994. Since then, the RMB has never fallen below the rate at the time of unification and has generally appreciated.

Similarly, during the 1997-98 Asian Financial Crisis, while many Asian currencies depreciated sharply, China pledged not to devalue the RMB and maintained exchange rate stability, winning widespread international acclaim. During the 2008-09 global financial crisis, China again demonstrated this resolve, with the RMB remaining strong and even appreciating. History has shown that the market will follow clear central bank guidance and automatically drive RMB appreciation, without the need for sustained intervention.

Although China has maintained annual GDP growth above 5% since 2023, the country urgently needs to reduce its reliance on exports and expand domestic demand. In 2023, final consumption contributed 85.6% to economic growth, while net exports (exports of goods and services minus imports) contributed a negative 11.4%. However, in 2024, final consumption’s contribution dropped sharply to 44.5%, while net exports surged to 30.3%. This composition barely changed in the first three quarters of 2025 (with consumption contributing about 53.5% and net exports 29%). A stronger RMB would help reduce the share of net exports in economic growth, bring consumption’s contribution back to the 2023 level, and, by attracting foreign capital inflows, more effectively sustain economic growth.

There is an argument that Japan’s “lost decades”—a long period of economic stagnation—were caused by the sharp appreciation of the yen after the 1985 Plaza Accord, and thus China should avoid repeating Japan’s mistake. In fact, this lacks an analysis of the deeper causes of Japan’s stagnation. In 1985, the yen’s exchange rate against the US dollar was basically in line with its purchasing power parity, and was not undervalued. By the same standard, today the RMB is severely undervalued against the US dollar.

More importantly, Japan’s prolonged stagnation was mainly caused by policy mistakes. Japan adopted excessively loose monetary and fiscal policies, quickly creating a massive asset bubble: from 1985 to 1990, Tokyo real estate prices tripled, and the Nikkei Index soared nearly fourfold. The Bank of Japan began tightening monetary policy in 1989, but it was both too late and too weak. When the bubble burst, the Bank of Japan actually intensified tightening, causing asset prices to plummet in a downward spiral. Between 1991 and 2009, Tokyo housing prices fell 60%, and the Nikkei lost as much as 80% from December 1989 to March 2009.

China’s situation is quite the opposite. After several years of declining real estate and stock markets, household wealth has shrunk, consumer confidence is low, and people are unwilling to spend, instead putting money in banks or prepaying mortgages. From 2015 to 2019, household disposable income grew by an average of 8.8% annually, while personal deposits increased by 10.2% per year. From 2020 to 2024, disposable income growth slowed to 6.1% per year, but personal deposits increased to 13.0% per year. As a result, households have hoarded vast amounts of cash. By the end of 2024, personal deposits reached 150 trillion RMB, exceeding total GDP (13.5 trillion RMB).

Although household balance sheets still need repair, mainly because housing prices have yet to reverse their decline, the stock market is rebounding strongly: in the 12 months ending September 2025, the MSCI China Index rose three times as much as the MSCI USA Index, and the MSCI China Index’s price-earnings ratio stands at only 16.1, far below the US’s 28.5, so there is still room for further gains.

Gradual RMB appreciation will help repair household balance sheets and boost consumer confidence. If just 5% of household deposits are released into consumption, that would amount to 7.5 trillion RMB, about 5.6% of 2024 GDP, which would have an enormous impact on economic growth.

China has ample monetary and fiscal policy space, far exceeding that of Japan at the time or any other economy today: real interest rates are higher than those in the US in a zero-inflation environment, and the reserve requirement ratio for commercial banks remains above 6% (the US is at 0%, the EU/Japan only 1%). Each 1% reduction in the reserve ratio releases 2 trillion RMB in liquidity. On the fiscal side, IMF data shows that in 2024, China’s total government debt (including local government financing vehicles) is 124% of GDP. However, National Bureau of Statistics data shows that net state-owned assets are over 150% of GDP, meaning the government’s total balance sheet is not net debt but net assets, providing room for further fiscal expansion.

Conditions are ripe for a significant appreciation of the RMB, but it should proceed gradually to mitigate the impact on exports. Even if it appreciates 50% over five years, the RMB would still be 25% below today’s purchasing power parity. Steady appreciation will help expand domestic demand, attract foreign investment, and ease concerns among international trade partners about China’s export strength and the resulting surge in protectionism. Recently, the central bank has continued to set the midpoint of the RMB’s floating range at a higher level, sending a signal of appreciation. It could consider stepping up these efforts to reinforce market expectations and guide the RMB to sustained strength.

Weijian Shan is Executive Chairman of PAG and author of Out of the Gobi, Money Games, Money Machine, and Money and I.