Nilesh Shah says China’s $1 trillion trade surplus is built on an undervalued Yuan, not just on innovation and competitiveness

China’s trade surplus has crossed a staggering $1 trillion in just 11 months, and a lot of articles have attributed this to Chinese innovation and competitiveness, but the one factor not credited enough is the undervalued Chinese Yuan, said Nilesh Shah, Managing Director of Kotak Mutual Fund.

Shah believes that while these factors do play a role, one crucial element remains largely overlooked: China’s deliberately undervalued Yuan (CNY).

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Shah posted on social media platform X that, “Chinese trade surplus has crossed $ 1 trillion in just 11 months. Lot of articles ( China has one of the best PR machinery in the world ) attributed this to Chinese innovation and competitiveness. One factor was probably not credited enough. Undervalued Chinese Yuan.”

https://x.com/NileshShah68/status/1998238383915638884?s=20

A trade surplus of this magnitude should normally lead to a sharp appreciation in the country’s currency as global demand for its goods—and therefore its currency—rises, Shah said. Yet the Chinese Yuan has barely moved. From around 8.28 in 2000 to about 7.07 today, the currency has appreciated only about 15% in over two decades.

“This is achieved through iron clad intervention by the Chinese Central Bank and band fixing for the currency on a daily basis,” the MD of Kotak Mutual Fund said.Shah further adds that China today holds the largest foreign exchange reserves in the world, both in absolute terms and as a percentage of global reserves—far ahead of Japan.

In the previous century, Japan was the miracle economy with higher growth, cutting-edge technology, and strong exports which ran the trade surplus but this is nothing compared to China.

The Japanese Yen has appreciated nearly 81%—from around 360 in 1973 to about 70 by 1995. That appreciation fundamentally reshaped Japan’s export economics. Rest is history.

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This raises the million-dollar (or trillion-dollar) question: What would China’s trade surplus look like if the Yuan were genuinely market-determined?