ROI — Europe gets the yuan rise it wants — just not the way it wanted: Mike Dolan

) By Mike Dolan LONDON, Oct 13 (Reuters) — Europe is getting the yuan adjustment it wanted, though via an unwelcome route. French debt tensions have pushed the single currency to 3-1/2-year lows against China's offshore yuan, helping blunt the competitive threat from an expected wave of Chinese exports. How durable the yuan move is beyond the French tensions will now be closely monitored by Brussels and European capitals.

0" has rumbled all year in Europe, as Beijing's trade standoff with Washington has stoked fears that European markets will be flooded with rerouted Chinese goods, with an influx of cheaper Chinese electric vehicles unnerving Europe's own auto sector in particular. However, there have been some positive twists for Europe of late as markets await the latest Chinese trade report this week.

On Friday, European Trade Commissioner Maros Sefcovic announced in Beijing that China and the European Union had reached a deal that could cut Chinese exports of hybrid cars to the bloc by more than half, following talks in Beijing aimed at reducing the EU's ballooning trade deficit with China. The EU-China agreement limits imports of hybrid cars ​from China to 350,000 vehicles a year, most likely from ​early December, with a 6% annual increase thereafter. 12 billion) a day. 5 billion a year earlier, according to Chinese customs data.

The figure was nearly nine times the $845 million exported in 2021. The newly struck agreement on a quota may sour some Chinese carmakers' loftier ambitions, but all sides appeared to welcome the negotiated result as preferable to a trade war. There were also reports that some Chinese firms may agree to manufacture in Europe, with all the local employment boosts that go with this. The bilateral deal between the economic giants was another sign of the times ushered in since US President Donald Trump returned to office last year, with global trade rules taking a back seat.

But for now, it appears to be Trump without the tariffs. Real Fx Rate Squeeze In the background, however, another thorn in the trade relationship appears to be finally loosening in Europe's favour. Echoing years of similar accusations from Trump's team in Washington, European leaders have complained loudly this year that Beijing has kept the yuan artificially weak despite huge changes in relative input costs and related competitiveness. They insist the yuan should be allowed to rise.

European Central Bank chief Christine Lagarde said in June that EU leaders should consider yuan undervaluation when looking at trade gaps, and German Chancellor Friedrich Merz made the point squarely in July, saying China should let the yuan appreciate more. Public and private estimates of yuan undervaluation are in the 20% to 30% range, with some measures taking into account the surge in European producer input prices since the COVID-19 pandemic, compared with little or no change in Chinese equivalents.

That effect may have been exaggerated this year by the fresh rise in European interest rates during the US-Iran war, while China's dour domestic demand kept rates steady there. In a lengthy policy statement last week, the People's Bank of China rejected claims that China was actively suppressing the yuan as the EU talks unfolded. But the exchange rate is suddenly starting to play ball, by hook or by crook. The offshore yuan is strengthening again.

On Monday, it hit its highest level since April 2023 against the generally weaker euro, while also hitting its strongest level against the dollar in over four years. Driven by China's ongoing trade surplus expansion, the yuan's real effective exchange rate has bounced back more than 8% overall since the aftermath of Trump's tariff shock last year to sit at its strongest in two years — the opposite of how markets assumed it would react to the resumption of the US trade war. The yuan's appreciation against the euro alone is now as much as 10% over the past 12 months, with a 5% move in the past six weeks.

Additional euro weakness on the back of French budget and bond-market problems may have pushed it over the edge. European leaders will wish it were for other reasons, but they are starting to get what they consider a more level playing field, at least. That field probably doesn't level off completely until the yuan returns to levels seen just after the 2022 Ukraine invasion — requiring another gain of at least 10% from here. How much China sees this as a price worth paying for keeping its trade routes open is another question.

What happens to the euro if the French budget standoff is resolved may test the true nature of this currency break. ) Enjoying this column? Check out Reuters Open Interest (ROI), your essential new source for global financial commentary. Follow ROI on LinkedIn, and X.

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