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Great Power Competition & the Outlook for the RMB Exchange Rate

Mar 10-2026   



*This article is based on a keynote speech by Shi Kang, Professor of Economics at the Chinese University of Hong Kong and Distinguished Professor at Tsinghua University's PBC School of Finance.

Great Power Competition & the Outlook for the RMB Exchange Rate in the 15th Five-Year Plan Period

The Framework and Determinants of Sino-American Great Power Competition

From a macroeconomic perspective, both China and the United States are navigating external shocks and internal structural adjustments while grappling with the impacts of technological transformation. They are currently experiencing the growing pains of transitioning from old to new growth drivers. Historically, China and the US have enjoyed highly complementary advantages, making cooperation the most rational and inevitable choice for both parties. However, the current trend of deglobalization is becoming increasingly pronounced, with signs of "decoupling" emerging between China and the US. The future is likely to see a pattern of partial decoupling and fluctuating, often volatile, strategic competition. In the long term, the United States will inevitably pursue reindustrialization, though this will be challenging and a large-scale return of American manufacturing is unlikely in the near future. Meanwhile, China will undoubtedly accelerate its progress in monetary policy and capital market development, particularly with regard to the internationalization of the RMB.

Although technology is widely considered to be the main arena of competition between China and the United States, I would argue that the decisive factor lies elsewhere. The true determinant of great power rivalry lies within each nation's domestic conditions. China's core internal challenge is its closed-loop economic growth model, which has historically been underpinned by land finance, property development, and urban operations. While this model has made significant contributions to infrastructure development and manufacturing expansion over the past two decades, it has now entered a negative feedback loop. China's fiscal system and consumption structure both urgently require transformation. President Xi Jinping's timely call to build a financial powerhouse encompasses six core elements, the most important of which is a robust currency.

The Logic and Significance of RMB Appreciation During the 15th Five-Year Plan Period

The RMB exchange rate serves as a pivotal indicator in great power competition, representing both a breakthrough point and a critical juncture in the construction of a financial powerhouse. In theory, exchange rates should correlate positively with economic fundamentals. However, over the past decade, the RMB's performance has been largely decoupled from economic growth. Consequently, I would argue that the RMB has been undervalued for a considerable period.

International patent filings provide a more accurate reflection of genuine innovation levels. Globally, China now leads the United States by a considerable margin in terms of international patent applications. China has advantages in terms of its talent pool and engineering capabilities, both of which provide robust support for its economic development and the strengthening of the RMB.

In the areas of trade, monetary policy, and fiscal policy, China has consistently pursued prudent policies, creating ample room for expansion. By 2025, China's foreign trade surplus is expected to exceed one trillion US dollars for the first time. This is characterized by a diversification in export destinations and a shift towards higher-value goods. It is crucial to correctly understand China's trade surplus at present. Objectively speaking, moderate RMB appreciation is both reasonable and necessary.

As a key asset price, the RMB exchange rate significantly influences market expectations. Furthermore, RMB appreciation will create favorable conditions for capital account liberalization, promote the currency's circulation in international markets, and ultimately promote full convertibility. Overall, I believe the trend towards RMB appreciation is clear. Therefore, China's current macroeconomic policies should be more accommodative.

Policy Recommendations

Recommendation One: Further Easing of Monetary and Fiscal Policies

While China currently implements a moderately accommodative monetary policy, its intensity remains far from sufficient. I advocate explicitly adopting a moderate inflation target. The rationale behind this lies in the fact that the most pressing issue confronting China's economy is the property market. Given that commodity prices such as gold, silver, and copper are all rising, why have property-related asset prices failed to increase in tandem? This is precisely because inflation levels have not yet reached a reasonable range. Once inflation rises, market confidence in property will be restored. It is only when the property market stabilizes that local government finances can become more secure, China's capital markets can gradually strengthen, and the Chinese economy can achieve healthier development.

Recommendation Two: Income Doubling Plan for Middle- and Low-Income Groups

To stimulate consumption, it is crucial to introduce substantive fiscal support measures. By providing tangible financial support, we can strengthen the economic foundation and steadily raise the income levels of middle- and low-income groups. Only in this way can we fully restore consumer confidence and market sentiment, thereby strengthening the economic foundation.

I firmly believe that the RMB will appreciate during the 15th Five-Year Plan period. This will bolster confidence in China's economy and provide positive forward-looking guidance for all market participants. Against this backdrop, our policies should be more proactive, and we should view China's economic prospects more optimistically. This will create a virtuous cycle, propelling China's economy towards sustained and healthy development.


Great Power Competition & the Outlook for the RMB Exchange Rate

Mar 10-2026   



*This article is based on a keynote speech by Shi Kang, Professor of Economics at the Chinese University of Hong Kong and Distinguished Professor at Tsinghua University's PBC School of Finance.

Great Power Competition & the Outlook for the RMB Exchange Rate in the 15th Five-Year Plan Period

The Framework and Determinants of Sino-American Great Power Competition

From a macroeconomic perspective, both China and the United States are navigating external shocks and internal structural adjustments while grappling with the impacts of technological transformation. They are currently experiencing the growing pains of transitioning from old to new growth drivers. Historically, China and the US have enjoyed highly complementary advantages, making cooperation the most rational and inevitable choice for both parties. However, the current trend of deglobalization is becoming increasingly pronounced, with signs of "decoupling" emerging between China and the US. The future is likely to see a pattern of partial decoupling and fluctuating, often volatile, strategic competition. In the long term, the United States will inevitably pursue reindustrialization, though this will be challenging and a large-scale return of American manufacturing is unlikely in the near future. Meanwhile, China will undoubtedly accelerate its progress in monetary policy and capital market development, particularly with regard to the internationalization of the RMB.

Although technology is widely considered to be the main arena of competition between China and the United States, I would argue that the decisive factor lies elsewhere. The true determinant of great power rivalry lies within each nation's domestic conditions. China's core internal challenge is its closed-loop economic growth model, which has historically been underpinned by land finance, property development, and urban operations. While this model has made significant contributions to infrastructure development and manufacturing expansion over the past two decades, it has now entered a negative feedback loop. China's fiscal system and consumption structure both urgently require transformation. President Xi Jinping's timely call to build a financial powerhouse encompasses six core elements, the most important of which is a robust currency.

The Logic and Significance of RMB Appreciation During the 15th Five-Year Plan Period

The RMB exchange rate serves as a pivotal indicator in great power competition, representing both a breakthrough point and a critical juncture in the construction of a financial powerhouse. In theory, exchange rates should correlate positively with economic fundamentals. However, over the past decade, the RMB's performance has been largely decoupled from economic growth. Consequently, I would argue that the RMB has been undervalued for a considerable period.

International patent filings provide a more accurate reflection of genuine innovation levels. Globally, China now leads the United States by a considerable margin in terms of international patent applications. China has advantages in terms of its talent pool and engineering capabilities, both of which provide robust support for its economic development and the strengthening of the RMB.

In the areas of trade, monetary policy, and fiscal policy, China has consistently pursued prudent policies, creating ample room for expansion. By 2025, China's foreign trade surplus is expected to exceed one trillion US dollars for the first time. This is characterized by a diversification in export destinations and a shift towards higher-value goods. It is crucial to correctly understand China's trade surplus at present. Objectively speaking, moderate RMB appreciation is both reasonable and necessary.

As a key asset price, the RMB exchange rate significantly influences market expectations. Furthermore, RMB appreciation will create favorable conditions for capital account liberalization, promote the currency's circulation in international markets, and ultimately promote full convertibility. Overall, I believe the trend towards RMB appreciation is clear. Therefore, China's current macroeconomic policies should be more accommodative.

Policy Recommendations

Recommendation One: Further Easing of Monetary and Fiscal Policies

While China currently implements a moderately accommodative monetary policy, its intensity remains far from sufficient. I advocate explicitly adopting a moderate inflation target. The rationale behind this lies in the fact that the most pressing issue confronting China's economy is the property market. Given that commodity prices such as gold, silver, and copper are all rising, why have property-related asset prices failed to increase in tandem? This is precisely because inflation levels have not yet reached a reasonable range. Once inflation rises, market confidence in property will be restored. It is only when the property market stabilizes that local government finances can become more secure, China's capital markets can gradually strengthen, and the Chinese economy can achieve healthier development.

Recommendation Two: Income Doubling Plan for Middle- and Low-Income Groups

To stimulate consumption, it is crucial to introduce substantive fiscal support measures. By providing tangible financial support, we can strengthen the economic foundation and steadily raise the income levels of middle- and low-income groups. Only in this way can we fully restore consumer confidence and market sentiment, thereby strengthening the economic foundation.

I firmly believe that the RMB will appreciate during the 15th Five-Year Plan period. This will bolster confidence in China's economy and provide positive forward-looking guidance for all market participants. Against this backdrop, our policies should be more proactive, and we should view China's economic prospects more optimistically. This will create a virtuous cycle, propelling China's economy towards sustained and healthy development.