Deutsche Bank says China’s yuan remains undervalued against the euro, widening EU trade deficit
The growing currency gap between the yuan and euro is fueling record trade imbalances that could ripple into broader markets, including crypto
The core issue is straightforward: when one country’s currency stays artificially cheap against its trading partners, its exports become more competitive. China’s goods flood into Europe at bargain prices, European manufacturers struggle to compete, and the trade gap balloons. The EU’s goods deficit with China has surged to roughly €360 billion, which works out to about €1 billion per day bleeding out of Europe’s trade ledger.
How undervalued are we talking?
An IMF analysis referenced by ECB President Christine Lagarde estimated the yuan is undervalued by approximately 15-16% after accounting for various adjustments. German Chancellor Friedrich Merz went further, suggesting the undervaluation could be as high as 30% and calling for G7 discussions to address the issue.
A study by the German Economic Institute (IW Köln) conducted in July 2025 drew a direct line between the yuan’s chronic weakness and the ballooning euro-zone trade deficits. The real euro appreciated over 40% against the yuan from early 2020 to spring 2025.
A December 2025 analysis from the Rhodium Group attributed much of the yuan’s depreciation to deflationary pressures inside China and deliberate policy choices by the People’s Bank of China. China’s economy has been grappling with sluggish domestic demand, a struggling property sector, and producer prices that kept falling.
Why Europe is getting nervous
A €360 billion annual goods deficit represents a massive transfer of economic activity from European factories to Chinese ones. European industrial sectors, from steel to solar panels to electric vehicles, are feeling the pressure.
Chancellor Merz’s push for G7 coordination signals that Europe may be moving beyond complaints toward actual policy responses. The playbook could include retaliatory tariffs, anti-dumping measures, or coordinated pressure on China to let the yuan appreciate.
The ECB finds itself in an awkward position too. A stronger euro helps fight inflation by making imports cheaper, but it simultaneously hollows out the export sector. Lagarde highlighting the IMF’s undervaluation estimates suggests the central bank is at least tracking the issue closely, even if it lacks direct tools to address it.
What this means for crypto and broader markets
If the EU escalates with tariffs or trade restrictions, it could trigger broader risk-off sentiment in traditional markets. For traders positioned in forex or macro-sensitive assets, watch for any formal G7 statement on currency manipulation. If Merz gets his G7 discussion and it produces actual commitments, the ripple effects could reach well beyond the euro-yuan pair.
When China’s currency weakens, Chinese investors historically look for ways to move money offshore. Crypto has served as one channel for that in the past, though Beijing’s crackdowns have made it harder. Any renewed depreciation pressure on the yuan could revive that dynamic.