Given China's substantial trade surplus and the private sector's net external creditor position, the contractionary effect of Renminbi appreciation on the macroeconomy cannot be underestimated.
China's Central Economic Work Conference emphasized that this year, the country will continue to implement more proactive and effective macro policies, enhance the consistency and effectiveness of macroeconomic policy orientation, and combine policy support with reform and innovation. The focus will be on stabilizing employment, businesses, markets, and expectations, promoting qualitative improvement and reasonable quantitative growth in the economy, and achieving a good start for the 15th Five-Year Plan. Notably, for the fourth consecutive year, the conference reiterated the goal of maintaining the basic stability of the Renminbi exchange rate at an appropriate and balanced level. As a large open economy, China faces conflicts between internal and external economic equilibrium, which is a crucial starting point for understanding the current Renminbi exchange rate policy.
The latest balance of payments data shows that last year, China's current account surplus reached $734.9 billion, a year-on-year increase of 73.4%, setting a historical record. The surplus accounted for 3.5% of the nominal GDP for the same period, an increase of 1.3 percentage points from the previous year. Quarterly data reveals that the current account surpluses for the third and fourth quarters were $198.7 billion and $242.1 billion respectively, consecutively setting new quarterly records. These surpluses accounted for 4% and 4.4% of the nominal GDP for their respective quarters, meeting or even exceeding the international alert threshold of 4%, which may invite increased international pressure for a Renminbi revaluation.
When economic overheating coincides with pressure for local currency appreciation, and the goals of internal and external equilibrium align, it is easier to achieve consistency in macroeconomic policy orientation. An example is the period following the 2008 global financial crisis when China actively pursued "reducing the surplus and promoting balance." The Renminbi appreciation at that time was a顺势而为 move.
The current economic situation, however, is different. On one hand, China's current account surplus, particularly the goods trade surplus, continues to increase and remains large, indicating both the necessity and potential for Renminbi appreciation. On the other hand, the domestic economy faces a prominent contradiction of strong supply versus weak demand, necessitating the continuation of more proactive fiscal policy and appropriately accommodative monetary policy to strengthen counter-cyclical adjustments.
Under the pressure of extreme tariffs, the expansion of the goods trade surplus is not only due to China's strong competitive advantages in exports and its稳固 position in global industrial and supply chains but also reflects insufficient domestic effective demand and a widening gap between savings and investment. According to customs statistics, last year China's exports grew by 5.5%, imports remained largely flat compared to the previous year, and the trade surplus reached a record $1.19 trillion. Achieving overall export growth despite a 20% decline in exports to the United States was no small feat.
However, statistics from the World Trade Organization (WTO) show that in the first three quarters of last year, China's share of global exports was 14.36%, a slight decrease of 0.03 percentage points year-on-year. Notably, the second and third quarters saw consecutive year-on-year declines of 0.03 and 0.20 percentage points, respectively. More importantly, China's share of global imports in the first three quarters was 9.69%, a decrease of 0.76 percentage points year-on-year, which is significantly larger than the decline in export share.
Theoretically, when facing the complex situation of conflicting internal and external equilibrium goals, macroeconomic management should follow the Tinbergen Rule. This principle states that the number of policy instruments should be at least equal to the number of policy targets, and each type of instrument should focus on the target (or area) it is best suited for. Generally, exchange rate policy should be responsible for external balance (i.e., balance of payments equilibrium, currently interpreted as reducing the current account surplus), while fiscal and monetary policies should be responsible for internal balance (i.e., economic growth, price stability, and employment).
In the past, China's overall net external creditor position (or net foreign assets) was held officially, primarily through the management of central bank foreign exchange reserves. Foreign liabilities, however, were held by the private sector. Under this structure, although Renminbi appreciation raised concerns about the devaluation of foreign reserve assets and potential financial losses for the central bank, the management of these reserves prioritized social effects over economic returns. Furthermore, funds outstanding for foreign exchange were accounted for on the central bank's books using historical cost rather than market value.
Now, the private sector has shifted from being a net external debtor to a net external creditor. Renminbi appreciation will reduce the value of private sector foreign exchange income and external assets, making market participants potentially more sensitive to appreciation than depreciation. This increases the difficulty of exchange rate management. For instance, against a backdrop of strong bullish sentiment, the surplus in banks' spot and forward (including options) foreign exchange settlement and sales—a key indicator of domestic foreign exchange supply and demand—exceeded $100 billion for two consecutive months in December last year and January this year, ranking as the first and second highest monthly surpluses in history. In this sense, the current environment of China's foreign exchange market is different from the past, necessitating greater attention to exchange rate management and expectation guidance. It is essential to avoid accumulating appreciation pressure and reinforcing appreciation expectations due to insufficient exchange rate flexibility, while also preventing rapid appreciation that could trigger market panic and lead to overshooting—an excessive deviation from economic fundamentals.
To this end, the "China Monetary Policy Execution Report for the Fourth Quarter of 2025," when discussing the policy approach of "balancing internal and external considerations regarding interest rates and the exchange rate," proposed the following: First, steadily deepen market-based exchange rate reform, uphold the decisive role of the market in exchange rate formation, and leverage the exchange rate's function as an automatic stabilizer for the macroeconomy and balance of payments. Second, strengthen the monitoring and analysis of cross-border capital flows, adhere to bottom-line thinking and comprehensive measures, enhance the resilience of the foreign exchange market, stabilize market expectations, and prevent the risk of exchange rate overshooting. Third, guide enterprises and financial institutions to strengthen the concept of "risk neutrality," and instruct financial institutions to actively provide exchange rate hedging services to enterprises based on the principles of actual demand and risk neutrality.
Given China's substantial trade surplus and the private sector's net external creditor position, the contractionary effect of Renminbi appreciation on the macroeconomy cannot be underestimated. This should be factored into counter-cyclical fiscal and monetary policy considerations, with targeted efforts to increase对冲力度, fully tap economic potential, and adhere to the close integration of investing in physical assets and investing in human capital. The aim is to promote an economic development model increasingly led by domestic demand, driven by consumption, and characterized by endogenous growth. Through "expanding domestic demand and adjusting the structure," the gap between savings and investment can be encouraged to narrow, promoting China's economic rebalancing from the inside out.
In the external economic sector, besides leveraging the role of exchange rate adjustment, a "multi-pronged approach" should be坚持, intensifying relevant policy adjustments. This includes comprehensively addressing "involution-style" competition in foreign trade and economic activities, guiding enterprises to engage in foreign economic activities in an orderly manner, standardizing government tax incentives and fiscal subsidy policies, and reducing excessive incentives for exports and foreign capital utilization. While continuously creating a first-class international business environment to stabilize trade and foreign investment, it is also necessary to further eliminate institutional and systemic barriers to imports and outbound investment, and support and facilitate increased imports and expanded outbound investment (including direct and indirect investment).