The article was first published on Economist on July 28th, 2026.

Gita Gopinath was chief economist of the IMF from 2019 to 2022 and Pierre-Olivier Gourinchas from 2022 to 2026. Hélène Rey is a professor at London Business School.

THERE IS A comfortable ritual in international economic diplomacy. Whenever global imbalances emerge as a source of anxiety—as they have again today—the conversation gravitates towards the exchange rate. China runs large and growing external surpluses. America runs large and growing external deficits. Both are assessed as excessive by the IMF. If only policymakers could meet in some fancy hotel, agree to strengthen the yuan and weaken the dollar, the argument runs, then China would import more and export less, America would do the opposite and the world’s lopsided pattern of surpluses and deficits would gently correct itself. Of late, this view has gathered supporters in the West.

To be clear, the Chinese yuan is no doubt undervalued. But the emphasis on the exchange rate as the lever of adjustment is misplaced. In a G7 expert report and an IMF policy paper on global imbalances, both published this year (with input from the authors of this article), the exchange rate is treated not as a culprit, but as an outcome—an undesirable but predictable consequence of a particular configuration of domestic policies.

A country that suppresses household consumption while simultaneously facing a collapse of property investment will run persistent current-account surpluses and will, other things equal, have a weak currency. A country with insufficient private savings and unsustainably large fiscal deficits will run persistent current-account deficits and will, other things equal, have a strong real exchange rate against other other currencies. The currency is misaligned because the underlying policy mix produces too much or too little saving. The exchange rate is a symptom, not the disease.

Some argue that China’s exchange rate reflects currency-intervention policies to keep the yuan weak. Indeed, the yuan does not float freely, and it is possible to engineer both a persistent current account surplus and a weak real exchange rate through a combination of capital controls, consumption suppression and foreign-exchange interventions. But China’s currency interventions in recent years have often been to prevent the currency from weakening, and the yuan, if anything, has been stable. The recent depreciation of China’s real exchange rate has followed mainly from weaker inflation in China relative to its trading partners.

The knee-jerk emphasis on the currency has two serious drawbacks, and they compound each other. The first is economic. Suppose China did revalue tomorrow, sharply and by fiat, with no accompanying change in its underlying macroeconomic policies. Would the required global adjustment follow? In all likelihood, it would not. In the short run, the nominal appreciation would have limited effect on China’s exports as the majority of its export prices are set in dollars and adjust slowly.

On the other side of the ledger, meanwhile, it would lower the yuan price of its imports immediately. All else equal, this can increase China’s imports and reduce its trade surplus. But all else is not equal: the stronger yuan would further exacerbate China’s deflation problem and reduce its overall demand. This is precisely the opposite of what rebalancing requires—which is that China absorb more of what the world produces.

Equally important, a nominal appreciation unsupported by macroeconomic-policy changes to rebalance the economy is likely to morph quickly into a real depreciation owing to deflationary pressures. Some argue that this would push China to reflate its economy. But if the goal is for China to ultimately pursue better policies, why not simply discuss those directly? Why route the request through the exchange rate?

The second drawback is political. Demanding a nominal revaluation as a headline concession is, in practice, extremely unlikely to be accepted. History is not encouraging. Contrary to what is often believed, the success of the Plaza Accord in 1985 relied on the co-operation of Japan and significant macroeconomic adjustments, including to America’s fiscal stance, to support the dollar’s depreciation. Today China may be more receptive to a conversation about strengthening its social safety net, its pension system or its non-traded service sector. When you push for growth-supporting reforms, you have a chance. When you push for an exchange-rate adjustment, you ask for conflict.

Big beautiful balance

None of this lets China off the hook. Its surpluses are real, large and a legitimate concern for the rest of the world, including for a European economy that cannot serve as the absorber of last resort. What China needs to do—and what is in its own long-term interest, given its ageing population and an investment model overly reliant on the tradable sector—is to raise the share of household income in GDP, expand social insurance so that families feel able to spend, and stop financing tradable-sector expansion at the expense of consumption. Do those things, and a real appreciation of the yuan will follow.

But let’s also be clear that the required adjustment is not only on China’s side. America will also need to tackle its unsustainable fiscal policy, as well as its persistently low private savings. That, too, cannot be addressed by exchange-rate gimmicks.

The G7 and the IMF locate the problem correctly: it lies in the constellation of domestic macroeconomic choices on both sides of the imbalance. A policy package, whereby China pivots to consumption and services-led growth, and America reins in fiscal deficits, is less spectacular than a grand currency bargain. But it has the advantage of being both effective and achievable.