Undervalued yuan costs Germany billions, study finds — €43bn boost possible if currency fairly valued
A new German Institute for the Economy (IW) study warns that the undervalued yuan is shaving billions off German growth each year, and that a fairer valuation could lift Germany’s GDP. The report, funded by the German Foreign Ministry, projects that correcting the undervalued yuan could raise real GDP by up to 0.3% by 2028, with cumulative gains of about €43 billion between 2026 and 2028.
Study finds measurable GDP gains for Germany
The IW study uses macroeconomic simulations to estimate effects of a stronger yuan on Germany’s economy. Researchers conclude that a one-time revaluation of the currency toward a fair value would produce tangible increases in output, exports and overall economic welfare for Germany.
The institute calculates that the bulk of the gains would emerge over the 2026–2028 period as trade patterns adjust and German exporters regain competitiveness in the Chinese market. Officials at the IW note the projected 0.3% GDP uptick is modest in percentage terms but represents significant absolute value given the size of the German economy.
Simulation scenario: 40% appreciation of the yuan
The analysis models a scenario in which the yuan appreciates roughly 40% toward what the authors describe as a fair value. IW economists say this adjustment approximates levels that would reflect market fundamentals rather than Beijing’s current management of the currency.
Under that simulation, Germany’s trade dynamics with China shift markedly: German exports to China recover while cheaper Chinese export pressures ease. The study treats the 40% figure as illustrative of the sizeable gap between the current exchange-rate setting and the institute’s assessment of fair valuation.
Trade figures show widening German deficit with China
The report highlights a sharp deterioration in Germany’s trade balance with China, noting that the deficit expanded to about €90 billion in 2025. IW researchers attribute much of that change to the price effects of a deliberately weaker yuan, which makes Chinese goods cheaper on global markets while raising the cost of goods entering China.
German manufacturers and exporters have seen their market share in China fall as a result, according to the study’s data. Concurrently, imports from China into Germany have risen substantially, contributing to the persistent imbalance in bilateral trade.
Currency management by Beijing underpins trade shifts
IW economists argue that Beijing does not allow a freely determined exchange rate for the yuan, but instead pursues a government-managed policy that keeps the currency comparatively weak. That managed approach amplifies export competitiveness for Chinese firms while imposing a headwind on foreign exporters, including many in Germany.
The institute points to the direct transmission mechanism: an undervalued yuan lowers the foreign-currency price of Chinese exports and raises the renminbi cost of imports, thereby skewing trade flows. The study asserts that this deliberate policy has been a central factor behind the structural shifts in Sino-German trade.
Effects on China: short-term pain, potential long-term gain
IW’s modeling indicates that a fair valuation of the yuan would also help China rebalance its export-dependent economic model. In the short term, Chinese GDP could decline as export growth slows, but the simulations forecast a relatively quick recovery driven by rising domestic demand.
As export attractiveness fades, a greater share of goods would remain within China, which the study expects would push down prices and stimulate household consumption. The institute argues that stronger internal demand could, within a few years, largely offset the loss of external surpluses and bring Chinese output back toward levels seen under the prior policy path by 2028.
Policy implications for Berlin and Beijing
The IW study, supported by the German Foreign Ministry, frames currency valuation as a policy lever with bilateral and global ramifications. For Germany, a fairer yuan would mean reduced trade distortions and a clearer path to export growth in key sectors such as machinery, automotive and industrial equipment.
For China, the report suggests that a managed appreciation could accelerate the shift to a consumption-led growth model, though it would require domestic policy adjustments to cushion short-term export losses. The study may prompt renewed calls in Berlin for diplomatic engagement with Beijing over exchange-rate practices and for coordinated international dialogue on trade rules.
The IW authors stop short of prescribing specific sanctions or tariffs, emphasizing instead that exchange-rate transparency and dialogue would be more effective tools to address persistent imbalances. German policymakers will likely weigh those recommendations against broader geopolitical and economic considerations.
The IW study underscores how exchange-rate policy can have asymmetric effects across economies and calls attention to the tangible costs borne by trading partners when a major currency is kept below its market valuation.