By Qaiser Nawab

The People’s Bank of China recently restated its position that China operates a managed floating exchange-rate regime based on market supply and demand, with reference to a basket of currencies. It also emphasised that China does not seek trade advantage through deliberate currency depreciation and that the market plays the decisive role in exchange-rate formation. RMB

The wider significance of this debate lies not in deciding whether one country’s currency is simply “too weak” or “too strong”. The more useful question is how exchange rates should be understood in a global economy increasingly shaped by capital flows, financial markets, industrial restructuring, technology and geopolitical uncertainty.

That requires moving beyond a narrow currency argument.

Competitiveness is built, not devalued

China’s economic rise over the past four decades cannot be explained principally by the value of its currency.

Its position in global trade rests on a much broader foundation: manufacturing scale, infrastructure, supply-chain depth, technological investment, logistics, human capital and integration into international markets. The structure of Chinese exports has also changed significantly, moving from a heavy concentration in lower-cost manufacturing towards more diversified and technologically sophisticated goods.

The PBOC’s recent analysis makes an important historical point. Periods of renminbi appreciation did not prevent China from increasing its share of global exports. Between 2005 and 2008, the currency appreciated substantially against the US dollar while China’s export share continued to rise. Similarly, later periods of appreciation coincided with further gains in international trade. Conversely, depreciation did not automatically translate into stronger export performance. RMB

This challenges the assumption that a weaker currency necessarily produces lasting competitive advantage.

Exchange rates certainly matter. A cheaper currency can make exports less expensive in foreign markets and increase the domestic cost of imports. But the effect is rarely straightforward.

Manufacturers increasingly depend on imported components, technology, energy and raw materials. Currency depreciation can therefore raise production costs at the same time as it reduces the foreign-currency price of finished goods.

The composition of trade matters as well.

A manufacturer selling basic products primarily on price may be highly sensitive to currency fluctuations. A company exporting advanced machinery, electronics, electric vehicles or specialised industrial equipment competes on more than price. Reliability, technology, scale, product quality, after-sales service and integration into global supply chains become increasingly important.

China’s trade has been moving in this direction. The PBOC document notes that high-technology products have become a growing part of the country’s foreign trade, while companies are also making greater use of hedging instruments to manage currency risk. RMB

This is important for the global debate because it suggests that industrial competitiveness is becoming less directly dependent on exchange-rate movements.

The renminbi itself has also become more flexible over time. China’s central bank notes that the currency has experienced repeated cycles of appreciation and depreciation since 2010 and that two-way volatility has become more pronounced. It also states that routine foreign-exchange intervention was withdrawn after 2017, while policy tools remain available to address exceptional market instability. RMB

Such an approach reflects a broader reality faced by central banks around the world: excessive currency volatility can itself become a source of financial instability.

Global imbalances have deeper roots

The larger issue is not China’s exchange rate alone. It is the structure of the international economic system.

Current-account surpluses and deficits are the result of many factors. Savings rates, household consumption, fiscal policy, investment levels, industrial competitiveness, demographics and cross-border financial flows all contribute to external balances.

The relationship between currencies and trade accounts has become particularly complex because financial transactions now dwarf the value of goods traded internationally.

According to the PBOC document, the share of international trade in total global foreign-exchange turnover has declined considerably over time. Capital flows, financial assets and investor expectations consequently exert greater influence over exchange rates than in previous decades. RMB

This can be seen whenever major central banks change interest rates.

A rise in US interest rates, for example, can attract global capital towards dollar-denominated assets. Emerging-market currencies may weaken as a result, even where their trade positions have changed very little.

The same is true of geopolitical events. Energy shocks, conflicts, financial uncertainty and sudden changes in investor sentiment can move currencies rapidly. These movements may have little direct connection with the competitiveness of a country’s factories or the size of its trade surplus.

The idea that a current-account surplus automatically proves that a currency is undervalued is therefore too simplistic.

The PBOC points out that several economies have maintained external surpluses while experiencing currency depreciation. Conversely, the United States has sustained substantial current-account deficits while the dollar has often remained strong. RMB

This does not mean that exchange-rate assessments are meaningless. It means they should be treated with appropriate caution.

Economic models can provide useful indicators, but they depend heavily on assumptions about productivity, savings, investment, demographics and other variables. Different models can consequently produce different estimates of what an “equilibrium” exchange rate should be.

That complexity should encourage more careful international discussion rather than increasingly politicised conclusions.

There is also a broader question of responsibility.

Global imbalances cannot be resolved sustainably by expecting surplus economies alone to adjust. Nor can deficit economies assume that external pressure explains domestic industrial weakness.

The PBOC argues that surplus economies should encourage consumption and investment, while deficit economies should strengthen savings, fiscal sustainability and industrial competitiveness. RMB

That is a useful framework because it recognises that adjustment must occur on both sides.

Towards a more balanced global economy

China itself is attempting to shift the structure of its economy.

Its economic planning increasingly places greater emphasis on domestic consumption, household income, social protection, technological development and a larger role for the domestic market. The recent PBOC statement notes that the contribution of consumption to economic growth has risen considerably over time and identifies further expansion of domestic demand as an important policy objective. RMB

This transition is important not only for China but for the wider world.

For decades, China has been one of the principal manufacturing centres of the global economy. A gradual shift towards stronger domestic consumption could create additional opportunities for exporters, service providers and investors from many countries.

But such transformations take time.

An economy of China’s scale cannot rebalance its relationship between investment, exports and household consumption within a few quarters. Nor can other major economies repair fiscal, productivity or industrial weaknesses through exchange-rate pressure alone.

There is a danger that currency debates become substitutes for more difficult conversations about structural reform.

Countries facing declining industrial competitiveness must examine domestic investment, energy costs, workforce skills, infrastructure and technological development. Surplus economies must consider whether stronger domestic demand can contribute to more balanced global growth.

The international monetary system itself must also evolve.

The dominance of a small number of reserve currencies, combined with enormous cross-border capital flows, means exchange-rate movements increasingly reflect conditions far beyond bilateral trade relationships.

A more stable global economy therefore requires cooperation rather than a search for a single culprit.

The renminbi debate should be approached in that spirit.

China has legitimate reasons to emphasise the role of market forces, industrial competitiveness and structural factors in explaining its trade performance. Other economies have legitimate interests in understanding how persistent global imbalances affect their own industries and financial stability.

These positions need not be mutually exclusive.

The productive response is greater transparency, continued market reform and serious attention to domestic economic adjustment across both surplus and deficit countries.

Currencies matter, but they are not shortcuts to prosperity.

Long-term competitiveness comes from productivity, innovation, infrastructure, skilled people and the capacity of economies to adapt to changing global demand.The writer, Qaiser Nawab, is a global youth leader, former deputy speaker of the Youth Parliament of Pakistan, and sustainable development advocate engaged in international