Deutsche Bank: RMB still about 15% undervalued against EUR

Overview

This report focuses on the long-term fair value of EUR/CNY. It is set against the backdrop of the EU's widening trade deficit against China and pressure on European manufacturing competitiveness. Deutsche Bank uses ten models to assess valuation divergence of the RMB against EUR and the notional Deutsche Mark from both purchasing power parity and external balance frameworks.

Core views

The central view is that although the RMB has appreciated recently against the euro, it is still undervalued by about 15% versus EUR; a year ago, the undervaluation exceeded 20%. Most models indicate that when measured against the notional Deutsche Mark, the RMB appears even more undervalued, suggesting Germany faces stronger relative competitiveness pressure than the euro area overall.

Analysis framework

The analysis first applies absolute PPP, relative PPP, and DBeer models to assess how price levels, inflation, productivity, terms of trade, and openness affect the fair value of EUR/CNY, and then uses FEER external balance models to estimate how much the exchange rate would need to move to restore the external balance to equilibrium based on current account, goods and services trade, income balances, and trade data.

Methodology notes

• Purchasing power parityAbsolute PPP and Big Mac Index/OECD PPP

  Derives fair value from cross-country comparisons of goods and service price levels.

  The Big Mac Index implies an EUR/CNY fair value near 4.20; using spot around 7.75, this suggests the RMB is undervalued versus EUR by about 45%. OECD PPP also indicates roughly 35% undervaluation. The report notes these models should be interpreted with long-term trend and productivity dynamics in mind.

• Purchasing power parityRelative PPP and DBeer

  Uses inflation differentials, productivity, terms of trade, and openness to explain long-run real exchange rates.

  The relative PPP model includes CPI and PPI variants; the PPI variant implies the RMB is about 14% undervalued versus EUR. The DBeer model implies a fair value slightly above 7.15, indicating the RMB is undervalued by about 8%.

• External balanceFEER

  Estimates how much the exchange rate should adjust for the current account or trade balance to return to equilibrium.

  Base-case FEER shows China's current account surplus near 4% of GDP, above the ten-year average of about 1.8%. On a trade-weighted basis, the RMB is undervalued by about 7.5%. Different FEER iterations all show the RMB close to historical undershoot extremes.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• CNY

  Primary research focus

  Strengths

  Multiple PPP and FEER models show the RMB remains significantly undervalued, and the recent appreciation has not fully closed the valuation gap.

  Weaknesses

  Some model outputs are sensitive to price definitions, subsidy transmission, current account measurement adjustments, and assumptions on external balance equilibrium.

  Comparison

  About 15% undervalued versus EUR, with a more pronounced undervaluation versus the notional Deutsche Mark.

  Risks

  If external balances converge, trade frictions intensify, policy intervention increases, or global risk appetite shifts, the valuation path could become unstable.

• EUR/CNY

  Main cross-currency pair

  Strengths

  Recent declines in EUR/CNY already reflect part of the RMB’s appreciation, and the undervaluation has narrowed compared with a year ago.

  Weaknesses

  According to the report’s models, spot remains above most long-term fair value estimates.

  Comparison

  The DBeer model implies a fair value slightly above 7.15, while spot at the time of writing was around 7.75.

  Risks

  European energy costs, China trade deficits, interest-rate differentials, policy communication, and changes in China’s external surplus may all affect the exchange rate.

• DEM/CNY

  Notional reference valuation for Deutsche Mark vs RMB

  Strengths

  Used to capture Germany’s relatively stronger competitiveness pressure compared with the euro area overall.

  Weaknesses

  DEM is a notional currency, not directly tradable, and outcomes depend on constructed German price and external balance data.

  Comparison

  Almost all models indicate greater RMB undervaluation versus the notional Deutsche Mark than versus EUR.

  Risks

  Changes in Germany's external balance, goods and services trade, and income balances affect this notional valuation result.

Key data

• Core estimated RMB undervaluation versus EURabout 15%Central estimate from Deutsche Bank's ten models.
• Undervaluation a year agoabove 20%The degree of undervaluation has narrowed after the RMB's recent appreciation.
• Big Mac Index implied EUR/CNY fair valueslightly below 4.20Based on Big Mac prices around CNY 25.5 in China and EUR 6.10 in the euro area.
• Spot EUR/CNY at report dateabout 7.75Used for comparison with PPP-implied fair values.
• OECD PPP implied RMB undervaluationabout 35%Based on broader goods and service price level baskets.
• Detrended absolute PPP undervaluationabout 20%Estimated after removing long-run productivity and price convergence trends.
• PPI-relative PPP undervaluationabout 14%The report suggests true undervaluation could be larger if subsidies are not fully reflected in producer prices.
• DBeer model fair valueslightly above 7.15This model indicates the RMB is undervalued by around 8% versus EUR.
• China current accountaround 4% of GDPHigher than the ten-year average of around 1.8%.
• Euro area current account+1.7% of GDP, ten-year average +1.9%The euro area is only mildly overvalued under the base FEER case.

Impact & implications

If the RMB continues to appreciate toward fair value, it could marginally ease Europe’s competitive pressure relative to China, especially in Germany. The report also emphasizes that European competitiveness is driven by multiple factors—including energy prices, subsidies, industrial upgrading, and trade structure—and that exchange-rate reversion to EUR/CNY fair value alone cannot fully resolve the issue.

Risks

• PPP models may diverge from spot over the long run, with absolute PPP especially sensitive to productivity, income levels, and non-tradable price differences.
• External balance models rely on assumptions about the current account, trade data, and exchange-rate elasticities; statistical alignment changes can affect valuation outcomes.
• Subsidies, energy prices, industrial upgrading, and changes in European trade structure may weaken the explanatory power of exchange rates.
• If policy intervention, capital flows, or risk appetite change, RMB valuation reversion may not follow the model path.
• The report is macro-FX research and does not constitute buy/sell recommendations on any single security.

What to watch

• Whether EUR/CNY continues to move toward the fair-value range estimated in the report.
• Whether China's current account and goods trade surplus begin to retreat from elevated levels.
• Whether the euro area and Germany's trade deficits with China show sustained improvement.
• Changes in European energy costs, subsidy policy, and manufacturing competitiveness.
• Policy statements from the G7, European Union, Germany, and China regarding exchange rates and trade competitiveness.
• Whether Deutsche Bank's expectation of further RMB strength is realized.