Washington has tested Beijing's patience with threats to take action over the yuan for two decades, and Beijing has played them mostly like waiting for a bomb to explode. It's a different year this year and it's easy to understand why.

China's currency on Wednesday pulled back from a three-and-a-half-year high against the dollar, following the People's Bank of China's decision to ease the daily reference rate by 33 pips Wednesday, or further than traders had anticipated, and the biggest difference in more than six months. Even as the central bank has been tinkering with the daily fix to put a damper on the yuan's appreciation, the yuan has still appreciated by about 4% against the dollar this year, among the best performing Asian currencies. On 28th August, the rate was at about 6.73, approximately 5.5% higher than the same time last year. Beijing, therefore, is not opposing the strengthening of the yuan as a matter of principle. It's looking for ways to manage a rising that it no longer can stop.

What's happening with the pressure now? The maths of China's trade surplus have become too difficult to ignore. Brad Setser, a former official at the US Treasury and USTR and now at the Council on Foreign Relations, has put the argument in a series of recent papers that has moved the discussion out of the academic realm and into the venue of the finance ministries of the G7 nations. The current account surplus in China is currently about 4% of GDP, three points higher than the IMF's recommended surplus of 1%, suggesting an undervaluation of some 20%.

If you account for data distortions that Beijing itself doesn't account for gold imports of 1.5% of GDP in the second quarter, and an investment-income deficit of $125 billion that no one, even the IMF, can explain by reference to the $4 trillion in undervaluation of net foreign assets the true figure of the two looks much higher. The revised number is 30% to 35%, according to Setser. Separately it has been calculated that gold reserves are 25% undervalued by Goldman Sachs, based on trade-basis calculations instead of the current account.

A group of economists led by former IMF chief economist Gita Gopinath is far more sceptical of the treatment, if not the diagnosis, suggesting instead that a more gradual devaluation would help curb Chinese domestic deflation while also helping to ease global imbalances. They say the cure is to reform China's economy structurally, rather than trigger a currency shock.

This is no more a fringe argument. In a Foreign Affairs article, Setser and Shahin Vallée from the German Marshall Fund argued that the “old fashion” currency diplomacy should be revived, and that the G7 should make an appreciation of the won and the yen alongside the yuan a joint and central demand, instead of a bilateral annoyance. The notion was put to the test in June, when the leaders of the Group of seven major economies, under the French presidency, brought up the subject of global macroeconomic imbalances for the first time in years.

The French delegation boiled it down to one statement: “China makes too much, the United States eats too much and Europe invests too little.” Leaders agreed that the IMF needs to focus on external imbalances more. What they failed to create, again, was a joint statement, and China, interestingly, wasn't even present.

The politics are important because the funds were already shifted in the past and they shifted quickly. In May 2025, Taiwan's life insurers unwound the dollar hedges, and the Taiwan dollar rose by about 9% against the greenback in just days, in anticipation of a possible disorderly unwind of Asia's currency pegs if it's not central banks that set the pace, but markets. This episode has been referenced repeatedly by currency market experts and is an example of what not to do when a “controlled” appreciation goes out of control.

The urgency of the stand-off comes from trade figures. In 2025, the bilateral U.S. goods deficit with China fell by $93.4 billion to $202.1 billion, the figure the Trump administration has used to show it is making its tariffs pay off. However, the overall US trade deficit changed very little as the trade flows simply diverted through Vietnam, Mexico and other third countries trade chains shifted, but did not diminish. So far, the tariffs are taking a real fiscal toll at home: customs collections surged from $79 billion last year to $264 billion this year, with a much larger fiscal burden falling on the American importer and consumer than on Beijing. A currency correction will perform more of the rebalancing of global trade function than another round of tariff escalation if it is not really rebalancing trade but simply relabelling where goods pass through customs.

Beijing's own statistics debunk its claims it can't afford a stronger currency. In fact, industrial profits continued to grow by 17.6% year-on-year in the first seven months of 2026, albeit at a slower rate than during the first half of the year, which isn't the sign of a threatened economy that would warrant continued undervaluing of exports through the depreciation of the exchange rate. Beijing's own aspirations run counter to the other: Xi has called for the renminbi to be a “powerful currency” that has a global reserve role, and that is “flatly incompatible” with the currency management approach of suppression. In what ways Wall Street is betting, it's a gradual move in that direction, whatever Beijing says in public; Bank of America lowered its year-end forecast to 6.60 per dollar, while Goldman gave a 6.80–7.00 allowance as a forecast for the next two years.

This does not guarantee a breakthrough. China, for its part, wasn't there, has no interest in giving it away for free, and can rely on a group of sincere, good faith economists who believe that forced appreciation may lead China to a deflationary spiral that would harm everyone. The difference between the two numbers is too large to gloss over with more generous daily fixings, however, and China's currency policy must catch up.