Fed’s Final Cut Sparks Market Uncertainty as Asia-Pacific Indexes Slip

Economic

Summary:

Despite an initial boost from the U.S. Federal Reserve's third rate cut in 2025, most Asia-Pacific markets closed lower as investor optimism waned and key economic indicators showed mixed signals across the region....

Federal Reserve’s Rate Cut Fails to Sustain Asian Momentum

The Federal Reserve’s decision to lower the federal funds rate by 25 basis points to a range of 3.5%–3.75% briefly lifted global investor sentiment. Chair Jerome Powell stated that the Fed is now well-positioned to “wait and see” how the economy unfolds, marking a possible end to the current easing cycle. This message, intended to reassure investors of policy stability, coincided with U.S. stock gains but failed to sustain momentum in Asia-Pacific markets.

The Dow Jones Industrial Average surged by 1.1%, the S&P 500 rose by 0.7%, and the Nasdaq climbed 0.3% following the announcement. These movements reflected investors’ temporary optimism that the Fed might be pivoting toward policy support amid a weakening labor market and persistent inflation concerns, partly attributed by Powell to tariff-related pressures.

Asia-Pacific Markets Reverse Early Gains

Despite initially responding positively, most Asia-Pacific indexes lost ground by the end of Thursday trading. Japan’s Nikkei 225, which opened higher, ended the session down 1.11% to 50,040.65, while the broader Topix index also slipped by 0.52%. The loss appears to reflect investor doubts over the sustainability of global growth without further monetary stimulus.

South Korea's Kospi declined 0.73% to 4,104.85, while the Kosdaq fell 0.36%. Meanwhile, the Hang Seng Index in Hong Kong dipped marginally by 0.06% to 25,526.38 after a short-lived 0.1% rally, indicating a rapid reassessment of risk in a fragile economic environment. The mainland Chinese CSI 300 index also posted minor losses, suggesting investors were not comforted by the Fed's decision.

Australia’s S&P/ASX 200 index remained flat, closing slightly up 0.09% at 8,587.10. This muted reaction suggests that local markets remain cautious about global economic uncertainty and await domestic catalysts.

ZTE Stock Slump Highlights Regional Vulnerabilities

A notable decline came from ZTE Corp, whose shares plunged more than 5% following reports that the company may be fined over $1 billion by the U.S. government for alleged foreign bribery. This event had a direct and negative effect on regional sentiment, particularly in technology-heavy sectors, illustrating how firm-specific geopolitical risks can reverberate through broader markets.

Beyond the rate cut, the Fed announced plans to resume purchases of $40 billion in Treasury bills starting Friday. Short-term Treasury yields fell as a result, indicating a potential shift in investor focus from inflation control to economic support. This move may signal that the Fed is subtly rebalancing priorities amid slowing labor momentum, as evidenced by the removal of language that previously emphasized a “low” unemployment rate in official statements.

The U.S. dollar also weakened, with the dollar index falling to as low as 98.54 its lowest point since October 21. This trend might further pressure Asia’s export-oriented economies, as currency strength against a declining dollar may reduce competitiveness in global trade.

Interplay of Economic Factors and Investor Sentiment

While the Fed’s rate cut initially provided a tailwind to equity markets, its effects appear to have been short-lived across Asia. This pattern suggests a potential correlation not necessarily causation between U.S. monetary policy and Asian market performance, where broader regional factors such as geopolitical risks (e.g., ZTE’s case), local economic conditions, and trade uncertainty continue to dominate investor decision-making.

The divergence between initial market optimism and later-day losses highlights a deeper sentiment shift. Investors may increasingly interpret policy pauses not as confidence signals but as signs of limited central bank flexibility in facing persistent inflation and weak growth both domestically in the U.S. and globally.

Although the Fed’s rate cut was intended to reinforce confidence, markets across the Asia-Pacific region responded with caution rather than enthusiasm. The fading gains underline that monetary easing alone may no longer be sufficient to anchor optimism, particularly when confronted with structural risks, trade headwinds, and corporate uncertainties such as ZTE’s legal troubles. As 2025 winds down, investors appear to be reassessing their risk appetite, awaiting clearer signs of sustainable economic growth across major economies.

Source: CNBC

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Gerik

Political

A Shift from Sanctions to Physical Seizures

The US’s interception of the Skipper, a 20-year-old very-large crude carrier (VLCC) allegedly linked to illicit Venezuelan-Iranian oil flows, signals a major escalation in its enforcement of sanctions. Previously known as Adisa and sanctioned in 2022, the tanker was identified as stateless and previously docked in Venezuela. A US official claimed it was bound for Cuba, though the vessel's size and route raise questions, as VLCCs rarely serve that corridor.

US Attorney General Pam Bondi confirmed the action via video, showing commandos descending by helicopter in a classic maritime seizure maneuver. The move, according to maritime legal experts, raises the stakes for all marginal shippers and “dark fleets” operating near sanctioned oil flows.

Venezuela's Defiant Response and Geopolitical Messaging

Venezuela called the seizure an act of “piracy” and vowed to defend its sovereignty and natural resources. In a national statement, Caracas reiterated that the ongoing US pressure is ultimately about controlling Venezuela’s vast oil reserves. This narrative is politically potent, especially as opposition leader María Corina Machado receives the Nobel Peace Prize, further inflaming internal political tensions.

President Nicolás Maduro, already under pressure due to US accusations of narcotrafficking and authoritarian rule, responded by ramping up border and coastal military activity, deploying ships, aircraft, and drones. He also encouraged national militia enlistment, suggesting preparation for wider confrontation.

US Political Context: Trump’s Strategic Posturing

President Trump, speaking at the White House, touted the seizure as the “largest ever,” reinforcing his hardline stance against anti-American regimes. The action also fits a broader geopolitical pattern: Trump has threatened Venezuela repeatedly and hinted at possible land-based interventions. With the 2026 election cycle underway, this move strengthens his image as a security-first leader and aligns with a zero-tolerance posture toward Iranian and Venezuelan oil evasion schemes.

Oil markets reacted cautiously but upwardly: Brent futures ticked higher amid growing concerns over maritime disruptions and potential retaliatory actions. Although Venezuela’s crude exports are limited due to sanctions, the move introduces a new risk premium not because of volume, but because of the strategic escalation and supply chain ripple effects.

Analysts, including Rystad Energy's Jorge Leon, view this as a “clear escalation” from financial sanctions to physical interdictions, creating a geopolitical floor for oil prices. Shipping industry experts note that even fringe tanker operators previously willing to take risks may now pause or abandon routes linked to sanctioned Venezuelan oil, effectively choking off even discounted flows to China and Cuba.

Chevron and US Business Interests Remain Shielded

Chevron, which continues joint operations with Venezuela’s PDVSA under a US Treasury license, reported no disruption. CEO Mike Wirth affirmed ongoing compliance discussions with the Trump administration. This distinction underscores the selective enforcement strategy: pressure hostile governments, but protect US corporate interests where legally authorized.

The Skipper incident reveals a sharp pivot in US strategy toward more aggressive maritime enforcement. The implications are broader than Venezuela: they reverberate across the shadow oil trade, especially networks linked to Iran, North Korea, and sanctioned Russian vessels.

As the US tightens enforcement ahead of potential 2026 geopolitical flashpoints (e.g., Taiwan, Iran, Russia), the global shipping community, insurance firms, and oil traders may need to reprice geopolitical risks not because of supply volume, but because of rising confrontation risks on the seas.workaround via backdoor trading routes

Source: Reuters

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Justin

Forex

Commodity

India's crude oil imports from Russia are on track to climb to a six-month high in December as the world's third-biggest buyer defies U.S. sanctions on Moscow's oil producers.

Crude arrivals from Russia are expected to rise to 1.85 million barrels per day (bpd) in December, from 1.83 million bpd in November, according to data compiled by commodity analysts Kpler.

India's December imports from Russia are likely to have risen for a third consecutive month and are the highest since June's 2.10 million bpd.

While the South Asian nation's appetite for Russian crude has not been diminished by the U.S. sanctions against top Russian producers Lukoiland Rosneft, what has changed is the mix of buyers.

The largest chunk of Russian oil being imported by India in December is being offloaded at Vadinar port, with Kpler estimating arrivals of about 658,000 bpd, up from 561,000 bpd in November and above the average for 2025 of 431,000 bpd.

Vadinar port serves the refinery of the same name, which is owned by Nayara Energy (ESRO.M3), in which Rosneft owns a 49.13% stake.

The refinery is capable of processing 405,000 bpd, meaning that its current level of imports from Russia is well in excess of its capacity.

This in turn suggests that Nayara is storing crude in the hope that the sanctions against Russian oil and refined products are eased, or that enough buyers will be prepared to ignore them.

It's likely that the current rate of imports from Russia to Vadinar cannot be sustained as the refinery will run out of storage space, given that it currently has capacity to hold about 20 million barrels of both crude and products.

RELIANCE CUTS

While Nayara has ramped up imports from Russia, India's major privately-owned refiner Reliance Industrieshas moved in the other direction.

It is on track to import about 293,000 bpd from Russia in December through its port at Sikka on India's west coast, which supplies the 1.24 million bpd Jamnagar refinery complex.

This is down from 552,000 bpd in November and is well below the 826,000 bpd in June, which was the highest this year, according to Kpler data.

Reliance, which has a 500,000 bpd long-term deal with Rosneft, has said it will comply with U.S. and European sanctions, a move viewed as protecting its export flows to Europe and minimising the risk of legal action against the company.

But it increasingly appears that Reliance is the exception among Indian refiners, with state-owned companies accounting for about 904,000 bpd of imports from Russia in December, according to Kpler.

It would seem that the new U.S. sanctions, announced in October, have failed to cut India's imports from Russia, with India likely making the calculation that the discounts on offer are enough to outweigh any political fallout.

China is the only other major buyer of Russian crude, and it also is continuing to import at the same pace it has done for most of the year.

China's seaborne imports from Russia are expected to reach 1.36 million bpd in December, up from 1.22 million bpd in November and higher than the 1.22 million bpd average in 2025, according to Kpler data.

It's easy to leap to the conclusion that the array of sanctions on Russian crude have failed to dent imports by China and India.

But while volumes have been largely unaffected, it's likely that China and India are demanding, and receiving, bigger discounts, meaning that Russia's revenue from oil sales will be declining.

Whether this is enough to keep further Western sanctions from being imposed is a risk factor that remains for the global crude market.

Source: TradingView

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Winkelmann

Forex

Stocks

Spain imported the largest number of BYD vehicles in the European Union in the first 10 months of the year, with analysts saying the Mediterranean country is a more attractive launchpad for the Chinese automaker than other ports in Western Europe.

Spanish customs data provider Datacomex released figures in November showing that 28,400 BYD vehicles arrived at Spanish ports between January and October. Within the European Union, Italy was just behind Spain. Outside of the bloc, the U.K. received nearly twice as many cars.

Spain was not the final destination for many of the cars, but a springboard to other markets within the EU. Analysts said lower operating costs in Spain make it more attractive than the Netherlands and Belgium. They also pointed out that Spain was convenient for BYD, given its proximity to Italy and Portugal, where EV and hybrid penetration remains low.

"Spain functions as a very efficient logistics hub," said Matthias Schmidt, founder of Schmidt Automotive Research. "Rotterdam (in the Netherlands) and Zeebrugge (in Belgium) used to play that role for Chinese brands. Now Valencia and Barcelona are taking over."

Only 12,600 BYD battery electric vehicles (BEV) were registered in Spain in the first 10 months of 2025, equal to 15% of the total across 18 markets in Western Europe, including the U.K., based on Schmidt figures.

Analysts said the numbers in Spain were inflated by fleet deals with holiday rental companies in the Canary and Balearic Islands, plus a one-off subsidy of up to 10,000 euros ($11,650) per vehicle offered to car owners in Valencia after the city was devastated by floods last year.

Including hybrids, BYD's performance in Spain looks even better. Schmidt research shows that 19,423 BYD passenger vehicles were registered in Spain in the first 10 months of 2025, a staggering 497.6% year-on-year rise, making the brand easily the fastest growing in the country.

SAIC-owned MG remains the volume leader among Chinese marques, delivering 38,989 cars in the January to October period, but BYD's mix of pure electric and plug-in hybrid models, especially the Seal U DM-i and the new Atto 2, has struck a chord in a market where consumers are sensitive to prices and brand loyalty is low.

For example, BYD's Atto 2, an electric compact car, sells for 22,900 euros in Spain, compared with 25,990 euros for the Citroen eC3X, one of the most popular small cars in the EU.

An analyst at Xataka, a tech portal, cited a generational shift in attitudes, saying that younger Spanish buyers who grew up with Xiaomi phones and AliExpress purchases no longer equate "Made in China" with poor quality.

BYD is aggressively expanding its dealership network in Spain, as in Germany and Britain. It expects to add another 29 dealerships in Spain next year to the roughly 100 operating now, according to company sources, under partnerships with established multibrand dealers such as Astara and Gamboa. This strategy lends it credibility and allows it to expand at speed.

But BYD may already be moving beyond an import-only strategy in Spain, given the EU tariffs on Chinese EVs imposed last year. A BYD Spain executive acknowledged to Nikkei Asia that growth will moderate, although he said the company should retain enough margin to absorb part of the cost increase stemming from the tariffs.

Nonetheless, Reuters reported in October that Spain was a top contender for a third BYD plant in Europe, after Turkey and Hungary, with a decision expected in China as soon as December.

Stellantis-backed Chinese automaker Leapmotor is also expected to confirm production at Zaragoza in northeastern Spain, according to media reports. Chery, another Chinese manufacturer, already assembles small volumes of Ebro-badge models in Barcelona, while battery makers CATL and Envision AESC are building gigafactories in the country.

While Spain's car brands -- SEAT and Cupra -- are relatively unknown compared with German, British and Italian marques, the country is the second-largest carmaker in Europe, after Germany. The automotive sector contributes about 10% of Spain's gross domestic product and 18% its exports, according to Invest In Spain, a unit of the country's Ministry of Economy, Trade and Business.

Analysts said Spain is a natural choice for Chinese automakers because it has a highly skilled workforce that makes cars for Mercedes, Volkswagen, Ford, Stellantis and Renault. The country's high unemployment also makes it easier for companies to hire.

"Spain has emerged as one of Europe's pivotal automotive manufacturing hubs, thanks to a unique combination of structural and strategic advantages," said Jan Burian, an automotive industry expert. "The unemployment rate has created a deep pool of skilled and competitive labor, reinforced by decades of automotive tradition."

Source: Asia_Nikkei

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Gerik

Economic

Domestic Production Cited, but US Ties Drive the Policy

Mexico’s Congress passed a significant trade measure on Wednesday, approving tariff hikes of up to 50% on a wide range of imports, most notably from China. The legislation, backed by President Claudia Sheinbaum’s Morena party, applies to more than 1,400 products and will take effect in January 2026. The move has been officially justified as a measure to encourage local manufacturing and reduce reliance on cheap foreign goods.

However, analysts argue the deeper motivation lies in Mexico’s strategic positioning ahead of the upcoming review of the United States-Mexico-Canada Agreement (USMCA). President Sheinbaum’s administration is seeking relief from U.S. tariffs still affecting key sectors such as automobiles, steel, and aluminum legacy measures from the Trump administration that remain in place. The tariff hike is seen as a diplomatic offering aimed at aligning Mexico with Washington’s broader trade stance, particularly in curbing China’s indirect access to the US market through Mexican assembly and re-export.

China Heavily Impacted as Tensions Rise

The policy will have the most substantial impact on China, Mexico’s second-largest trading partner. In 2024, Mexico imported $130 billion worth of Chinese goods, ranging from electronics and appliances to textiles, chemicals, and auto parts. The new tariffs reaching up to 50% will cover these product categories, raising the cost of doing business for firms that rely on Chinese intermediate goods.

The Chinese government has already criticized the proposed measures, calling them discriminatory and politically motivated. Mexico’s actions come as multiple governments, including those in the European Union and India, have grown wary of Chinese “dumping” practices and responded with their own trade barriers.

Tariffs as a Tool in USMCA Diplomacy

Trade analysts suggest that the tariff move is a calculated signal to the US that Mexico is willing to take concrete steps to prevent becoming a loophole for Chinese goods under USMCA. Oscar Ocampo of the Mexican Institute for Competitiveness emphasized that the tariffs are closely tied to US-Mexico negotiations over tariff relief. By demonstrating alignment with Washington’s concerns, Mexico may be seeking exemptions or reductions on existing US tariffs against its exports, particularly in politically sensitive sectors like autos and steel.

This realignment illustrates a causative relationship between US foreign trade policy and Mexico’s domestic economic decisions. The upcoming USMCA review, which could reopen contentious trade provisions, has pushed Mexico to adopt a more defensive and cooperative posture to safeguard its access to the American market.

Supply Chain Risks and Inflation Concerns

Despite potential diplomatic gains, the domestic economic consequences could be significant. Ocampo warned that the abrupt tariff hikes will disrupt established supply chains and could introduce inflationary pressure, especially as Mexico's economy shows signs of slowing. Sectors such as plastics, chemicals, textiles, and automotive components rely heavily on imported inputs from China. Raising costs on these goods risks weakening Mexico’s competitiveness in export manufacturing a core pillar of its economy.

Moreover, inflationary risks could constrain monetary policy flexibility at a time when domestic demand is already under pressure. The timing of the tariffs, combined with global economic uncertainties, raises the possibility of unintended spillover effects across multiple industries.

Mexico’s tariff escalation reflects the increasing entanglement between geopolitics and trade policy. While the government presents the move as a domestic production booster, the underlying strategy appears geared toward influencing US-Mexico trade relations ahead of the USMCA review. By raising barriers against China, Mexico hopes to secure favor in Washington but the cost may be borne by its own manufacturers and consumers. The effectiveness of this approach will ultimately depend on whether the US responds with reciprocal tariff relief or merely absorbs Mexico’s realignment as a baseline expectation.

Source: AP

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Gerik

Economic

China–U.S. Trade War

Export Diversification Strategy Pays Off

One year after President Donald Trump returned to office and imposed a new wave of tariffs on Chinese goods, Beijing’s response has been anything but a concession. Instead of weakening, China’s exports have surged, with outbound shipments growing 5.7% year-on-year in the first 11 months of 2025. Notably, this growth came despite an 18.3% drop in exports to the United States. The shortfall was more than offset by increased shipments to Europe (+8.9%), Southeast Asia (+14.6%), and Africa (+27.2%).

This pivot away from the U.S. market represents a strategic reorientation of Chinese trade patterns rather than a reactive workaround. While the shift was catalyzed by geopolitical tensions and trade restrictions, it leveraged long-term structural advantages: China's manufacturing scale, low-cost competitiveness, and investment in industrial capacity under the “Made in China 2025” initiative. These underlying capabilities allowed China to re-channel goods into receptive, price-sensitive markets with growing demand, particularly in the Global South.

Trade Surplus Reaches Historic Milestone

China's record-setting $1 trillion trade surplus in just 11 months underscores the success of this pivot, but it also highlights global structural tensions. The surplus reflects both China’s dominance in global manufacturing and the relative weakness of its domestic demand. While exports surged, imports rose just 0.2% year-on-year, indicating flatlining consumer activity and a broader imbalance in economic structure.

This external surplus is not just an outcome of trade rerouting; it also results from internal fragilities that suppress domestic consumption. With deflationary trends and subdued real income growth, Chinese households are not spending at levels sufficient to absorb the country’s massive industrial output, forcing producers to look abroad.

Domestic Weakness Driving External Aggression

Behind China’s booming export numbers lies a fragile domestic economy. The property sector, once a primary driver of investment and household wealth, continues its multi-year decline. This has undermined consumer confidence and constrained disposable income, particularly for the middle class, which remains overexposed to real estate assets.

Youth unemployment remains high, and China’s limited social safety net reinforces precautionary savings rather than consumption. These trends collectively reduce internal demand, leading to a self-reinforcing cycle: domestic weakness pushes producers outward, while overcapacity intensifies price wars and deflation at home.

The rise in exports, therefore, is not simply a testament to China’s competitiveness it is also a symptom of economic pressure. Deflation has become entrenched in key sectors, including electric vehicles, e-commerce, and construction materials, prompting the government to occasionally intervene in pricing behavior without launching comprehensive stimulus.

Transshipment Risks and Tariff Evasion Concerns

While China has effectively diversified its export base, some economists warn that the true scale of U.S. market exposure may be understated due to transshipment practices. Goods are increasingly routed through Southeast Asian countries, where they undergo minimal processing before being re-exported to the U.S., complicating tariff enforcement.

Washington has responded by negotiating bilateral transshipment agreements and imposing new levies on third-country intermediaries. However, accurately tracking these flows remains a major challenge, suggesting that part of China’s resilience may stem from circumvention rather than true market substitution.

Global Pushback Intensifies

The global response to China’s expanding export footprint has been swift. The European Union has launched multiple anti-dumping investigations and imposed tariffs on Chinese electric vehicles. French President Emmanuel Macron recently described the trade imbalance with China as “unbearable,” indicating that further barriers may be on the horizon. Similarly, countries like India and Brazil have grown increasingly vocal about the impact of Chinese goods on their domestic industries.

The combination of a real exchange rate depreciation, overproduction, and state-backed industrial policy has made Chinese goods hard to compete with regardless of tariffs. This dynamic risks entrenching China’s global dominance in low- and mid-tech sectors, while pushing more countries toward protectionism.

Leadership Signals: Stay the Course, For Now

Despite the risks, Beijing appears committed to its current approach. At recent Party meetings and in preparation for the upcoming Central Economic Work Conference (CEWC), President Xi Jinping has reiterated priorities focused on industrial strength, national security, and technological self-reliance without signaling major stimulus or a domestic consumption push.

While China is expected to meet its 5% GDP growth target in 2025, largely on the back of exports, the lack of attention to consumption and housing reform has disappointed analysts. Lisheng Wang of Goldman Sachs noted that Beijing is in “no rush” to launch broad-based stimulus, preferring targeted interventions and policy fine-tuning.

Trump’s tariffs may have succeeded in forcing China to adjust but not in the way intended. Rather than scaling back, China has become more globally assertive in its trade footprint, offsetting U.S. losses with gains in developing markets. Yet this export boom is built on a shaky domestic foundation marked by deflation, weak demand, and unresolved structural imbalances. With global trade tensions intensifying and protectionism on the rise, China's strategy of external reliance may offer short-term gains but poses long-term geopolitical and economic risks. As the CEWC approaches, whether China chooses to rebalance or double down will set the tone for the next chapter of global trade dynamics.

Source: CNN

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Gerik

Economic

Real Exchange Rate Weakness Boosting Export Edge

The International Monetary Fund has weighed into the ongoing debate surrounding China’s currency valuation, pointing to the real depreciation of the yuan as a key contributor to the country’s ballooning trade surplus, which surpassed $1 trillion in the first 11 months of 2025. According to the IMF, China’s persistently low inflation, relative to its trading partners, has effectively weakened the yuan in real terms, enhancing the global competitiveness of Chinese exports.

This condition has helped China expand its export dominance even as its domestic economy faces structural weakness. While IMF Managing Director Kristalina Georgieva refrained from explicitly recommending a yuan appreciation, she underscored that China’s current export-led strategy is unsustainable and risks exacerbating already strained global trade relationships.

Export Dependency Risks Deepening Global Friction

“China is simply too big to generate much growth from exports,” Georgieva said, cautioning that dependence on external demand would inevitably intensify trade disputes, particularly as major economies grow more sensitive to domestic industrial erosion. Her remarks reflect a shift in tone from previous IMF assessments that had grown more neutral on the yuan's value since the currency was added to the Fund’s Special Drawing Rights (SDR) basket in 2016.

The IMF now appears to echo the concerns long expressed by trade critics including former US President Donald Trump who accused Beijing of using an artificially weak yuan to maintain a trade advantage. Though China officially operates a "managed float" system and aims to keep the yuan "basically stable," analysts suggest the real exchange rate has declined to its lowest in more than a decade.

Goldman Sachs estimates that the yuan remains around 25% undervalued relative to its fundamentals, even as it heads for its first annual gain since 2021. This divergence underscores the growing tension between nominal exchange rate trends and underlying purchasing power.

Call for Demand-Side Policy Overhaul

Rather than directly calling for a stronger yuan, the IMF emphasized macroeconomic reform as the pathway to restoring balance. Georgieva and IMF mission chief Sonali Jain-Chandra both advocated for stronger domestic demand stimulation to lift inflation and gradually appreciate the real exchange rate. This would ease external imbalances by reducing the reliance on exports and aligning the exchange rate more closely with economic fundamentals.

“Boosting demand would reflate the economy, lift inflation and lead to an appreciation of the real exchange rate,” Jain-Chandra stated. This line of reasoning suggests a causal policy framework: stimulating household consumption and social safety nets leads to higher spending, which supports price growth and makes currency appreciation more feasible and market-driven.

External Imbalances Widen as Surplus Hits 3.3% of GDP

According to the IMF, China’s current account surplus is projected to reach 3.3% of GDP in 2025, up from 2.3% last year and the highest since 2010. Bloomberg’s calculations show that the Q3 surplus alone hit 3.4% of GDP. This widening surplus has once again placed China at the center of global macroeconomic adjustment debates, as many emerging markets and Western economies grapple with competitive pressures stemming from China’s vast export machine.

The real depreciation of the yuan plays a critical role here: with prices falling in China and staying elevated elsewhere, Chinese goods become cheaper globally even if nominal exchange rates remain relatively unchanged. This dynamic has led to fears of "export dumping" in key sectors such as steel, electric vehicles, and consumer electronics.

Policy Path Forward: Structural Reform and FX Flexibility

While avoiding direct accusations of currency manipulation, the IMF is clearly signaling that China’s current path is not aligned with the needs of the global economy. The Fund has renewed its call for greater exchange rate flexibility and more market-driven pricing mechanisms. It has also criticized excessive industrial policy support and called for a redirection of stimulus toward household consumption and social protection, aiming to reduce precautionary savings and foster sustainable growth.

These recommendations, if implemented, would gradually rebalance China's economy from an overreliance on investment and net exports to a more internally driven growth model one less likely to provoke retaliatory trade measures or geopolitical backlash.

The IMF’s latest intervention highlights mounting concerns over the global implications of China’s export-led recovery and the undervaluation of its currency in real terms. While China has made some moves to stabilize the yuan, the Fund is calling for deeper reforms to address the structural roots of external imbalances. Without a transition to consumption-led growth and more flexible exchange rate mechanisms, the risk of renewed global trade conflict may continue to grow especially as China's economic size makes it too large to avoid systemic impact.