Top European economic and finance officials are set to visit Beijing as they seek to persuade Chinese policymakers to let the yuan strengthen in order to help shrink a surging trade gap, the South China Morning Post reported exclusively.

Maarten Verwey, the European Commission’s director general for economic and financial affairs, would lead a delegation to the Chinese capital in the week of November 23. This would be followed by a joint mission around year-end probably comprising European Central Bank president Christine Lagarde, European Union economy chief Valdis Dombrovskis and Eurogroup president Kyriakos Pierrakakis, the SCMP said, citing unidentified people familiar with the situation. The Eurogroup comprises euro-area nations.

The EU delegation would meet People’s Bank of China governor Pan Gongsheng and Chinese Finance Minister Lan Foan amid complaints from European leaders that an artificially valued yuan is stoking a flood of imports that is jeopardising local industries. The PBOC has rejected the charge, instead arguing that China’s export boom reflects innovation and manufacturing prowess.

European officials will probably also unveil new trade defences on December 9, seeking to build on their success in winning a cap on Chinese hybrid car imports a few weeks ago. The tools will include a trade “kill switch” to quickly boot exporters out of EU markets, a measure encouraging businesses to diversify supply chains beyond a single country, and a mechanism to compensate companies that get caught up in trade wars.

China has pushed back at Europe’s toughening trade stance, with the Ministry of Commerce saying that the EU should “harbour no illusions about extracting concessions through pressure, still less underestimate China’s determination and ability to defend its own interests”.

European businesses and trade groups have argued against DiversifyEU, a tool that is implicitly designed to force companies to pare their reliance on China for supplies including vital rare earth minerals. The plan is unrealistic because “there is little or no alternative supply base, and Europe lacks the ecosystem to provide one”, the European Automobile Manufacturers’ Association said a submission to the EU. Technology trade group Orgalim said that “sourcing obligations introduced without a prior assessment of viable alternatives and/or adequate transition periods will most likely backfire”.

German Chancellor Friedrich Merz sought Japan’s support for a proposed global alliance of “like-minded partners” to defend rules-based trade and resist the use of tariffs and economic coercion. Earlier in the week, he made a pitch for closer Asia-EU trade ties in Singapore, as part of a region-wide trip. He also said that Europe and Asia must reduce “unhealthy, one-sided dependencies” in supply chains, technologies and raw materials.

Still, Merz said that full economic decoupling from China would be “a mistake” that “would make us neither safe nor more prosperous”, according to Reuters. Merz has taken an increasingly hard line towards China in recent months as Germany’s once dominant carmakers lose ground to Chinese competitors.

China’s yuan reached a four-year high against the US dollar and major trading partners on Thursday after the US Federal Reserve kept rates unchanged. The PBOC, which has guided the currency towards controlled appreciation, set the midpoint trading range at 6.7147 per dollar, the strongest since February 2023. The Hong Kong Monetary Authority also left its base rate unchanged at 4.25 per cent on Thursday. The city’s de facto central bank typically mirrors actions by the US Federal Reserve because of Hong Kong’s currency peg to the dollar.

False equivalence: “Growth in yuan financing demand cannot simply be equated with yen-style carry trades,” Miao Yanliang, chief economist at China International Capital Corp., said in a written interview, referring to a strategy where traders borrow currencies with lower interest rates to buy higher-yielding assets. “The yuan’s greater potential lies in relying on China’s strong real economy and its position in global supply chains to form a sustainable international investment and financing cycle.”

Necessary condition: It is true that a stronger yuan, without any change in domestic Chinese policies, most likely would result in slower Chinese growth. That would be a good thing; indeed, it is probably a necessary condition for a shift in China’s domestic policies. China has got an incredible six percentage points of growth from net exports since the end of 2018, with half of that coming in the past two years. Mr Xi unfortunately doesn’t feel the need to change his policies so long as net exports are keeping China’s headline growth up, even though continuing this unbalanced growth model will undoubtedly lead to protectionist pressures that extend well beyond Mr Trump’s presidency, and well beyond America. (The Economist) Managed appreciation: The central bank has been gradually strengthening its daily yuan official guidance this year, but at levels weaker than market expectations, suggesting it is seeking to manage the pace of appreciation, traders and analysts said.

“The PBOC continues to resist a faster pace of appreciation via weaker-than-market-expected fixings,” analysts at Barclays said in a note. “We think the PBOC’s reaction function points to a stronger floor against disorderly weakness, while the fixing should continue to constrain the pace of gains as the trade-weighted currency strengthens.”

Inducing changes: Revaluing the yuan would probably induce other policy changes to plug the world’s dramatic trade imbalances.

Slowing export growth would slow the Chinese economy, tempting Beijing to stimulate domestic consumption to compensate. A smaller Chinese trade surplus would shrink the pool of foreign funding for the US budget deficit, perhaps even encouraging fiscal restraint in Washington. (The Guardian) Lost momentum: The Chinese yuan’s impressive growth as a payment currency has lost its momentum over the last two years … The yuan overall still punches far below China’s economic weight.

Far from ditching the dollar, China is still tightly tied up in dollar-based global financial networks. The lack of gains in a period with rising global concerns about the dollar is particularly surprising, and it suggests Beijing will need to find new growth drivers if it wants to close the gap with the greenback. (Peterson Institute for International Economics) European officials will face a tough task when they try to convince Chinese officials to support faster currency appreciation.

Complaints about a weak renminbi have grown in Europe alongside a flood of low-cost Chinese imports that is overwhelming local businesses. China’s exports to the EU rose 16.4 per cent in the first nine months of the year, and the trade surplus has surpassed €1 billion (US$1.1 billion) per day.

German Chancellor Friedrich Merz led the charge in June, arguing that the yuan was as much as 30 per cent undervalued and urging China to work with other nations on strengthening it. Merz has also swung in favour of EU trade defences, ditching Germany’s traditional free-trade stance, as major local companies such as chemicals maker BASF and carmaker Volkswagen lose market share to fast-growing Chinese rivals.

The model Merz had in mind was the 1985 Plaza Accord, under which the United States, Japan, West Germany, Britain and France deliberately allowed the dollar to depreciate against the Japanese yen and German Deutsche mark in order to reduce the US trade deficit.

This is anathema to Chinese policymakers, who see Japan as having been forced into a deal that resulted in the “lost decade” of economic stagnation, following a drop in exports and the collapse of a property bubble.

Most Western economists would reject this description as too simplistic and instead point to domestic policy mistakes following the accord as the reason for Japan’s economic malaise. Noticeably, West Germany avoided similar fallout even after experiencing a similar currency surge from the same agreement.

Still, the Plaza Accord did hit Japanese exporters by making their products more expensive overseas. That’s not a scenario that plays well in China, as exports are the only solid pillar of the economy this year. Fixed-asset investments are in free fall and domestic consumption has cooled following the collapse of China’s real estate bubble some five years ago.

The nation’s exports surged by 23.8 per cent in the first nine months of the year, putting the trade surplus on track to surpass last year’s record of US$1.2 trillion. The boom in overseas sales will be key to full-year economic growth hitting the government’s target range of 4.5 per cent to 5 per cent.

The People’s Bank of China rejects suggestions that it is deliberately keeping the currency weak to boost exports, arguing that it would be difficult to pull this feat off over the medium to long term.

Instead, bank governor Pan Gongsheng said this month that the trade boom reflects four decades of “reform and opening up, an exceptionally large market, comprehensive industrial chains and infrastructure systems, an abundant supply of highly skilled workers, and sustained research, development and innovation”.

US Treasury Secretary Scott Bessent has also rejected the idea of a new Plaza Accord, calling the idea “misguided” and “an easy way to get around dealing with the real trade problem”.

Instead, he wants China to curb industrial subsidies and take steps to boost weak domestic demand.

China has allowed yuan appreciation this year, even if the moves are far short of what Europe might like. The yuan is trading at a four-year high against a basket of currencies, with the central bank having gradually raised the daily fixing point. Indeed, that’s helped dollar investors earn about 10 per cent on China bonds over the past year, based on Bloomberg indexes. By contrast, global bonds have lost 2 per cent and US Treasuries are down 1.5 per cent.

The PBOC seems content to let the yuan’s value drift slowly upwards for now at least. It’s unlikely to heed European requests to quicken the pace.