• German Chancellor candidate Friedrich Merz calls for G7 discussion on China's yuan, which he claims is undervalued by 20-30%.
  • The assertion reignites long-standing trade tensions and could pressure Beijing to allow greater exchange-rate flexibility.
  • Market participants are watching for any coordinated G7 stance that might affect global currency markets and trade flows.

G7 Spotlight on Yuan Valuation

Friedrich Merz, the Christian Democratic Union's candidate for German chancellor, thrust currency policy into the spotlight at the G7 summit, stating that China's yuan is undervalued by 20-30% and that this disparity needs to be addressed collectively. The remarks, delivered during a panel on global economic imbalances, signal a potential shift in tone among Western leaders toward more proactive engagement on exchange-rate issues.

"This is not just a German concern; it's a systemic issue that distorts trade and investment flows," Merz said, according to people familiar with the matter. He emphasized that the G7 should coordinate a unified message calling for greater yuan flexibility, rather than relying on bilateral pressure alone.

The claim aligns with long-standing analyses by institutions like the IMF, which have periodically assessed the yuan as moderately undervalued, though rarely by such a wide margin. Economists caution that the exact degree of undervaluation is difficult to pin down, depending on models and assumptions about China's equilibrium exchange rate.

Trade and Market Implications

A yuan that is cheap by 20-30% effectively subsidizes Chinese exports, making them more competitive abroad while raising costs for foreign exporters selling into China. This dynamic has been a flashpoint in U.S.-China trade relations, contributing to tariff wars and supply chain realignments. European leaders, particularly in Germany—home to major automotive and machinery exporters—have grown increasingly vocal about the need for a level playing field.

Markets reacted cautiously. The offshore yuan weakened slightly against the dollar on the news, though moves were muted as traders awaited concrete policy steps. "Without a coordinated G7 response, this is largely rhetoric," said a currency strategist at a major European bank. "But if it leads to joint action—say, a statement urging faster appreciation—that could shift expectations."

Political and Geopolitical Context

Merz's comments come amid broader G7 efforts to present a united front on economic security, including discussions on export controls, technology standards, and de-risking from China. A focus on currency manipulation could further complicate already tense relations, especially if the U.S. Treasury's upcoming semi-annual currency report flags China for closer scrutiny.

A spokesperson for the German delegation declined to comment on specific numbers, noting only that the G7 had a "constructive exchange" on global imbalances. Attempts to reach China's foreign ministry for comment were unsuccessful.

Looking ahead, investors will parse the G7's final communiqué for any explicit reference to currency policy. Even vague language could signal a shift, potentially spurring speculative bets on yuan appreciation. For now, the ball is in Beijing's court—whether to allow gradual yuan gains to forestall further international pressure, or to maintain its managed float and risk more pointed G7 action.