Europe is gaining some relief from China’s export competitiveness, but not through the currency adjustment its leaders have long demanded. Instead, mounting French fiscal tensions have weakened the euro against China’s offshore yuan, making Chinese goods relatively more expensive for European buyers and potentially easing pressure on the bloc’s manufacturers.
The currency shift comes as European governments grow increasingly concerned about a renewed surge of Chinese exports, particularly electric and hybrid vehicles, amid escalating trade tensions between Beijing and Washington. Whether the euro’s decline provides lasting relief will depend on the yuan’s future trajectory and whether Europe’s own financial pressures ease.
China’s Export Surge Raises Fears of a New Trade Shock
European policymakers have spent much of this year warning about the possibility of a second China shock, as Beijing’s trade confrontation with Washington raises the prospect of Chinese manufacturers redirecting more goods towards European markets.
The concern is particularly acute in the automotive sector, where competitively priced Chinese vehicles threaten European manufacturers already facing pressure from high production costs and the transition to electric mobility.
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Recent trade figures illustrate the scale of the challenge. Chinese exports of hybrid vehicles to the European Union reached $7.5 billion in the first half of the year, tripling from $2.5 billion during the same period a year earlier. The figure was nearly nine times the $845 million recorded in 2021, according to Chinese customs data.
European officials fear that further growth in these shipments could deepen the bloc’s trade imbalance with China and intensify competition for domestic producers.
Can the EU-China Hybrid Car Deal Ease Trade Tensions?
A negotiated agreement offers one potential response. European Trade Commissioner Maros Sefcovic announced in Beijing on Friday that China and the European Union had reached an arrangement intended to curb Chinese hybrid vehicle exports to the bloc.
Under the agreement, imports would be limited to 350,000 vehicles annually, with a 6% annual increase thereafter. The restrictions were expected to take effect in early December, subject to implementation.
The arrangement could reduce Chinese hybrid vehicle exports to Europe by more than half, easing some of the pressure on European automakers. It also offers both sides an alternative to a broader trade confrontation that could damage commercial relations and disrupt supply chains.
Reports that some Chinese manufacturers may consider producing vehicles in Europe also suggest that the dispute could encourage greater local investment and employment, although the extent of any such shift remains uncertain.
EU leaders are expected to discuss the agreement at their summit in Brussels as part of broader efforts to address a trade deficit with China that has exceeded €1 billion ($1.12 billion) a day.
The deal reflects a wider shift in global trade relations since US President Donald Trump returned to office, with negotiated restrictions increasingly competing with tariffs as governments seek to protect domestic industries.
Why Europe Wants a Stronger Chinese Yuan
Beyond trade restrictions, European policymakers have argued that China’s currency is undervalued, giving its exporters an additional competitive advantage.
European Central Bank President Christine Lagarde said in June that EU leaders should account for the yuan’s undervaluation when assessing trade imbalances. German Chancellor Friedrich Merz made a similar argument in July, calling on Beijing to allow the currency to appreciate further.
Estimates of the yuan’s undervaluation range from 20% to 30%, depending on the methodology used. Some assessments incorporate changes in production costs since the COVID-19 pandemic, arguing that rising European input prices relative to comparatively stable Chinese costs have widened the competitive gap.
A stronger yuan would make Chinese exports more expensive for European buyers while making European products relatively more affordable in China. That could help European manufacturers compete, although exchange rates are only one factor shaping trade flows.
Beijing has rejected allegations that it deliberately suppresses its currency. In a policy statement last week, the People’s Bank of China disputed claims that China was actively keeping the yuan artificially weak.
The Yuan Is Rising, but the Euro Is Also Falling
Recent currency movements have nevertheless delivered part of the adjustment European leaders have sought.
On Monday, the offshore yuan reached its strongest level against the euro since April 2023. It also strengthened against the US dollar to its highest level in more than four years.
The yuan’s real effective exchange rate, which measures its value against a basket of trading partners’ currencies while accounting for relative price changes, has risen by more than 8% since the aftermath of Trump’s tariff shock last year. It has reached its strongest level in two years, according to the figures cited in the report.
Against the euro alone, the yuan has appreciated by as much as 10% over the past 12 months, including a 5% increase in the preceding six weeks.
China’s expanding trade surplus has supported the currency’s strength, while the euro has come under pressure from concerns about France’s budget and bond markets. The resulting exchange-rate shift has made Chinese goods relatively more expensive in Europe, potentially reducing some of their price advantage.
However, this is not necessarily evidence of a lasting correction in China’s currency valuation. A substantial part of the recent movement reflects weakness in the euro rather than a deliberate decision by Beijing to strengthen the yuan.
What Happens if France’s Fiscal Crisis Eases?
The durability of the currency adjustment is now a key question for European policymakers.
If France resolves its budget dispute and investor confidence in the euro improves, the European currency could recover some of its recent losses. That would weaken the yuan’s relative advantage and potentially restore some of the price competitiveness European manufacturers have been seeking.
Conversely, continued fiscal uncertainty in France could prolong euro weakness, offering European exporters some indirect relief from Chinese competition without requiring Beijing to change its exchange-rate policy.
The distinction matters because European leaders have sought a structural adjustment in China’s currency, not a temporary advantage produced by financial instability within the eurozone.
The yuan may need to appreciate further to reach the levels that prevailed shortly after Russia’s full-scale invasion of Ukraine in 2022, according to the analysis underpinning the currency comparison.
Ultimately, Europe’s ability to compete with China will depend on more than exchange rates. Productivity, energy costs, industrial investment and the capacity of European manufacturers to innovate will also shape the outcome.
For now, Europe is receiving some of the currency relief it has demanded, but through a weakening euro rather than an explicit Chinese policy shift. Whether that advantage survives a recovery in European financial confidence will help determine how much of the recent adjustment represents a lasting change in the trade relationship.
With information from Reuters.
