China FX reserves rise as record trade surplus revives yuan valuation debate

China's foreign exchange reserves increased by USD 11.5 billion in December, reaching USD 3.36 trillion. This increase is attributed to a weakening U.S. dollar and comes amid a historic trade surplus close to USD 1 trillion over the first eleven months of 2025. Despite the yuan's nominal appreciation of around 3.3% against the dollar, analysts warn that this masks deeper undervaluation concerns. The yuan's real effective exchange rate shows it has significantly depreciated from its 2022 peak and remains undervalued against fundamental measures. China's export competitiveness is thus reinforced by this undervaluation while domestic demand is weak. Economists link this imbalance to structural issues such as a protracted property downturn, subdued household spending, and ongoing deflationary pressures. Calls for yuan appreciation are met with hesitation as policymakers are hesitant to allow substantial strengthening, fearing it could exacerbate deflation by lowering import prices and curtailing export growth. Without significant recovery in consumption and the property sector, potential appreciation risks becoming counterproductive. Policymakers show little urgency for large-scale stimulus, leading research institutions to predict that China's real exchange rate will continue to drift lower in the coming years, maintaining the trade surplus and unresolved currency debates.