German Chancellor Friedrich Merz is escalating a currency confrontation with China, claiming the yuan is undervalued by as much as 30% and calling for coordinated G7 action — a push that risks deepening the EU's trade rift with Beijing.
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Merz pushes yuan undervaluation claim as EU-China trade gap hits €360 billion
German Chancellor Friedrich Merz on Monday renewed claims that China's yuan is undervalued by 25%, urging the EU to open a currency dialogue with Beijing as the bloc's goods deficit swells to about €360 billion annually.
"We started an intensive discussion in the European Council," Merz said at the University of Cologne, according to Bloomberg. "We need a political currency dialogue with China."
The claim follows Merz's June assertion at the EU summit that the yuan is undervalued by 30%, when he suggested replicating the 1985 Plaza Accord that forced Japan to revalue the yen. European Central Bank President Christine Lagarde has cited an IMF analysis pegging the undervaluation at 15% to 16%, while a study by the German Economic Institute IW Köln found the real euro appreciated more than 40% against the yuan from early 2020 to spring 2025.
The escalating rhetoric signals Europe is moving beyond complaints toward potential policy responses — retaliatory tariffs, anti-dumping measures or coordinated G7 pressure on Beijing — that could reshape trade flows between the world's two largest economic blocs and hit sectors from electric vehicles to steel.
A €1-Billion-a-Day Trade Drain
The EU's goods deficit with China has ballooned to roughly €360 billion, or about €1 billion per day, according to data cited by Bloomberg. European industrial sectors from steel to solar panels to electric vehicles are feeling the pressure as Chinese exports flood into the bloc at prices European manufacturers struggle to match.
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.
The last time the EU escalated trade measures against China — the imposition of anti-subsidy tariffs of up to 45% on Chinese electric vehicles in October 2024 — Beijing retaliated with anti-dumping probes into European brandy and pork imports, disrupting about €10 billion in bilateral trade.
Beijing Rejects the Currency Narrative
China has pushed back firmly against the undervaluation claims. Pan Gongsheng, governor of the People's Bank of China, said at a March 2026 press conference that the country has "no need or intention to seek competitive edges in foreign trade through the depreciation of its currency." The PBC has maintained the yuan's exchange rate at "an adaptive, balanced level," he said.
Chinese Foreign Ministry spokesperson Mao Ning said that "de-risking" and "trade balance" are protectionism, warning that such measures "will only harm European consumer interests, raise corporate costs, and weaken long-term industrial competitiveness."
Despite the political tensions, European businesses continue to deepen their China exposure. German investment in China surged more than 55% last year compared with 2024, while Swiss investment jumped 66.8% and British investment rose 15.9%, according to Chinese customs data.
China has invited European Commissioner for Trade and Economic Security Maros Šefčovič to visit this autumn for the second meeting of the newly established China-EU trade and investment consultation mechanism, MOFCOM spokesperson He Yadong said on July 2.
What a Currency Showdown Would Mean
If Merz succeeds in rallying G7 support for coordinated pressure on the yuan, the playbook could include joint statements on currency manipulation, retaliatory tariffs, or anti-dumping measures. The Rhodium Group analysis noted that any forced appreciation of the yuan would reduce Chinese export competitiveness but could also trigger capital outflows as Chinese investors seek to move money offshore.
For European manufacturers, a stronger yuan would narrow the price gap with Chinese rivals but would not resolve structural issues such as China's overcapacity in steel, solar, and EVs. China's trade surplus narrowed 4.7% in the first half of 2026, with import growth outpacing exports, customs spokesperson Lü Daliang said Tuesday — a sign Beijing is already taking steps to rebalance trade.
The next flashpoint could come this autumn, when Šefčovič's visit to Beijing will test whether dialogue can contain the growing friction — or whether the EU follows Merz's call for a tougher stance.
This article is for informational purposes only and does not constitute investment advice.
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