Yuan Weakness Blamed by IMF for China’s Rising Economic Imbalances

We now face growing concern as the IMF warns that a weakening Chinese yuan is more than a financial headline. The currency’s drop isn’t just about exchange rates. It points to deeper problems inside China’s economy. Though China is still growing, the IMF expects about 5.0% growth in 2025 and 4.5% in 2026. But behind those numbers lies weak domestic demand and declining consumer confidence. We explore how the yuan weakness is connected to structural imbalances inside China. We look at what the IMF sees, why the yuan is sliding, and what it means for China and the world.

Overview of Yuan Weakness

The yuan is China’s main currency. It plays a big role in global trade. For years, China has relied on exports. That made strength less important than cheap export prices abroad.  But lately, the yuan has lost value against the US dollar and other major currencies. In 2025, mainland Chinese currency rates fell, hitting lows not seen since 2023. Some data shothe w offshore yuan sliding on multiple sessions as economic data disappointed markets. This depreciation didn’t happen in a vacuum. It links to weak inflation, lower demand, and global forces, all of which we’ll discuss more soon.

IMF’s Warning and Analysis

At the end of its 2025 mission to China, the IMF updated its outlook but also issued a warning. While China’s GDP forecast rose to 5.0% for 2025 and 4.5% for 2026, helped by fiscal stimulus and strong exports, the Fund cautioned that imbalances remain “significant.” IMF staff noted that weak domestic consumption and deflationary pressures have depressed demand at home. Because domestic prices and inflation in China remained low compared to trading partners, the “real exchange rate” fell. That made Chinese exports cheap, which boosted exports and the current‑account surplus. But this also worsened global imbalances.

In short, the IMF warns that yuan weakness isn’t just a monetary matter. It reflects deeper structural problems.

Causes of Yuan Depreciation

What drives the yuan’s slide? Several factors, both inside and outside China.

Internal factors

• Domestic demand is weak. The property sector remains shaky. The past slump in housing has cut household wealth and shaken consumer confidence. This has lowered spending.
• Inflation is very low, sometimes near zero. That means the “real exchange rate” depreciates.
• China’s financial sector and investment-driven growth show signs of strain. Banks face lower profit margins amid low interest rates.

External/global factors

• The US dollar has strengthened, putting pressure on the yuan exchange rate. That makes the yuan weaker against major currencies.
• Global capital flows have changed. China has seen reduced foreign investment inflows and some outflows. That affects demand for the yuan.
• Trade tensions and tariff threats, especially from the US, also weigh on investor confidence, indirectly pressuring the currency.

Taken together, these factors made the yuan lose value, which helped exports, but at the cost of deeper economic weakness underneath.

Impact of Yuan Weakness

Yuan depreciation has consequences, both inside China and globally.

Domestic impacts

• Cheaper yuan makes imports more expensive. That pushes up costs for businesses and consumers buying foreign goods.
• Weak consumption and deflation weigh on business and investor confidence. Many firms hold off on investment. That slows economic growth at home.
• Heavy reliance on exports and weak domestic demand means that households and domestic firms bear much of the risk.

Global impacts

• China’s cheaper goods are becoming more competitive around the world. That pushes up exports, raising China’s trade surplus. For 2025, IMF staff project China’s current account surplus to reach about 3.3% of GDP.
• Some trading partners may see trade imbalance tensions rise. Cheap Chinese exports can undercut local producers abroad. That stirs trade friction.
• Global supply chains and global trade patterns adapt: China remains a major source of low-cost goods globally. But global dependence on China’s export strength heightens vulnerability.

Outlook

Looking ahead, the weak yuan and economic imbalances could remain a concern. The IMF notes structural headwinds: an aging population, elevated debt levels, and falling returns on investment.  For now, China seems committed to keeping growth, helped by exports and fiscal or monetary stimulus. That will likely keep the yuan under pressure. Also, global conditions, like a strong dollar or slowing world demand, could continue to weigh.

But this path also means China’s economy stays heavily reliant on exports. Without stronger domestic demand, the imbalances may deepen, slowing sustainable growth and increasing global trade stress.

Conclusion

The weakening of the yuan is more than a currency story. It reflects deep economic imbalances inside China. As per the IMF’s 2025 review, weak domestic demand, deflation, and excess export reliance have made the yuan cheap. That has boosted exports, but at a high cost. For China, and for the world, this matters. A large export surplus paired with low domestic demand hints at fragility beneath growth figures. The strength of the yuan may not rebound soon, unless underlying economic issues are resolved. Until then, the story of the “cheap yuan” remains a warning sign of simmering trouble beneath the calm surface of numbers.

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The content shared by Meyka AI PTY LTD is solely for research and informational purposes. Meyka is not a financial advisory service, and the information provided should not be considered investment or trading advice.