The yuan is a lever, not a symptom

The world's deficit countries ran a combined current-account gap of 1.6 percent of global GDP in 2025, well short of the 2.6 percent peak on the eve of the financial crisis. The composition, however, is familiar: an American shortfall financed by Chinese savings, dressed this time in tariffs and industrial policy. The interesting question is not who to blame — the IMF and its critics agree the causes are multiple — but which lever moves first. On that, the dossier is one-sided.

The orthodox framing, restated this month by Liberty Street Economics, is that the American trade deficit is a macroeconomic identity: domestic saving falls short of domestic investment, and the gap is financed by foreign capital inflows. On that reading, tariffs cannot close the current-account deficit — the difference between what a country earns from and pays to the rest of the world — without a corresponding rise in private saving or a fall in the fiscal deficit. President Trump's invocation of the external deficit to justify Liberation Day tariffs sits awkwardly against this identity. The tariffs alter the composition of trade; they do not touch the saving–investment gap that generates it.

That pairing is the pivot of the argument. A country running a larger fiscal deficit should, all else equal

, absorb more of its own output and run a smaller external surplus. China has done the opposite. Spending on pensions and consumer trade-in schemes has risen even as the surplus has surged, according to The Economist's reading of the data. The implication is that the fiscal impulse is being routed through the tradable sector rather than the household — industrial subsidy rather than social insurance — and that the exchange rate is doing part of the work. The IMF's 2026 External Sector Report puts the midpoint of yuan undervaluation at 21.3 percent.

Symptom or channel

This is the sharper edge of the debate. The IMF-adjacent view, associated with Gita Gopinath, Pierre-Olivier Gourinchas and Hélène Rey, argues that a sharp unilateral yuan revaluation without accompanying macro-policy change would not deliver global adjustment, and that a nominal appreciation absent household-income reform would likely morph into a real depreciation via deflationary pressure. Their positive case is the slow one: raise the household income share, expand social insurance, shift away from tradable-sector-financed growth, and real appreciation follows. Nageswaran and Srinivas do not dispute the mechanics so much as the sequencing. Waiting for reform, they suggest, is how the surplus country wins the argument by default. Research by Ambrogio Cesa-Bianchi and co-authors — showing industrial-policy intensity correlates with export growth but not with headline surpluses — cuts both ways: it weakens the case for treating subsidy as the sole villain, but does not exonerate the exchange rate as a channel.

A currency level is visible every day. A reform pledge can be obscured indefinitely.

The dossier's forecasters lean the same way. Every named prediction sits on the side of yuan appreciation being necessary — differing only on whether it must be paired with fiscal reform in Beijing and Washington to work, or whether it can be forced first. There is no bearish counter-position in the cluster arguing that the current configuration is sustainable, or that tariffs alone can carry

the adjustment. Readers should treat this as a one-sided dossier: the disagreement is over sequencing and instrument, not direction. The operationalisable question for the next twelve months is narrower — whether Beijing's fiscal mix rotates measurably toward households, and whether the yuan's IMF-assessed undervaluation narrows from its 21.3 percent midpoint. If neither moves, Emmanuel Macron's description of the status quo as "unbearable" will get louder, and the tariff route — however poorly matched to the identity — will keep filling the vacuum.