Massively Undervalued Asian Currencies

G7-Evian 2026: When Global Imbalances Became a Political Priority

In June 2026, the G7 countries gathered on the picturesque shore of Lake Geneva in Évian‑les‑Bains – the same place where the G8 met in 2003, and long before that, in 1954, the Geneva Convention was concluded. This time, France, as the G7 chair, deliberately placed at the center of the agenda a topic that had been politely avoided for decades: global macroeconomic imbalances.

The French delegation formulated the essence of the problem with striking brevity:

“China produces too much, the United States consumes too much, and Europe invests too little.”

The outcome of the summit was telling: leaders agreed on the need for enhanced IMF oversight of external imbalances, yet – for the second year in a row – no final joint communiqué was signed, reflecting deep divisions within the group. China was not invited to the negotiating table. As the Atlantic Council noted:

“Without China at the table, breakthroughs are unlikely – France considers it an achievement that the problem is at least acknowledged.” It is precisely in this geopolitical context that Robin J. Brooks – former Chief FX Strategist at Goldman Sachs and now a leading independent voice in FX research – published his June 24, 2026 piece with a sharp thesis: the yuan (CNY), Korean won (KRW), and Taiwan dollar (TWD) are “massively undervalued,” not due to market forces but as a result of deliberate, covert currency intervention.

“In theory, a persistent current‑account surplus should not exist indefinitely. The surplus – through the payment flows it generates – should raise the value of the country’s currency, making its exports more expensive and thus eliminating the surplus over time. But we do not observe this in reality.” – Robin J. Brooks, “Massively Undervalued Asian Currencies,” June 24, 2026.

Why a Surplus Should Kill Itself – And Why It Doesn’t

Classical international trade theory is straightforward:

A country that exports more than it imports faces higher demand for its currency – foreign buyers must convert their money into the local currency to pay for goods. This excess demand should push the exchange rate higher. A stronger currency makes exports more expensive and less competitive → the surplus shrinks → equilibrium is restored.

In the real world, this self‑correcting mechanism can be blocked by a single tool:

a central bank (or its surrogate) that issues local currency and absorbs all foreign inflows.

If every yuan that a Chinese exporter receives is immediately purchased by a state bank in exchange for newly issued yuan, then market demand for the currency never translates into appreciation. Foreign currency accumulates in reserves (or on state‑bank balance sheets).

The yuan stays weak. The surplus grows further.

The Mechanism That Preserves the Surplus

• China exports → the foreign buyer pays in dollars
• Demand for yuan should increase → CNY would appreciate
• But: a state bank issues new yuan and buys up the incoming dollars
• Market demand for CNY is neutralized – the exchange rate does not move
• Dollars accumulate on the balance sheets of state banks (hidden reserves)
• The surplus persists and grows. The loop is closed.

The People’s Bank of China halted direct reserve accumulation after a wave of international criticism over currency manipulation. But state‑owned commercial banks quietly took over the same function. Formally, these are “market operations” – yet the actor is the same, the objective is the same, and the outcome is the same. Analysts argue that Taiwan and South Korea employ similar schemes through quasi‑state institutions.

The сhart above shows the real effective exchange rates of Taiwan (black), Korea (red), Japan (blue), and China (purple). The nominal exchange rate is what we all see on global FX markets. The real exchange rate, however, adjusts for differences in price levels across countries.

For example, if a country devalues its currency, inflation will rise, pushing domestic prices higher. This offsets part of the competitiveness gained through devaluation. That is why the real exchange rate is the most comprehensive measure of how strong or weak a currency truly is. The yen is unquestionably the weakest currency in Asia – but this is because Japan is in a dire fiscal position. As noted in many analyses, a weak yen is the inevitable result of the Bank of Japan artificially suppressing government bond yields. China, Korea, and Taiwan, by contrast, are the ones engaging in currency suppression.

Goldman Sachs’ View: The Yuan as a High‑Conviction Long

In its December 2025 and January 2026 research, Goldman Sachs assigned its “highest‑conviction” FX call for 2026 to a long CNY position. Analyst Teresa Alves, using the bank’s proprietary GSDEER and GSFEER models, concluded that the yuan is undervalued by roughly 25% on a trade‑weighted basis. A stricter GSDEER estimate places fair value around 5.00 per dollar, implying an undervaluation closer to 30%.

The reason: deflation in China, combined with inflation in the United States, has lowered China’s relative price level, making Chinese exports even cheaper in real terms.

Goldman’s key structural point is that the degree of yuan undervaluation today is comparable to the “China Shock” period of the mid‑2000s – the era that produced the largest revaluation in half a century. Under US pressure, China shifted to a managed float in 2005 and allowed the yuan to appreciate 21% by 2008. Goldman draws a direct analogy between that episode and the current situation.

Low inflation and high productivity in China relative to the United States have gradually pushed the GSDEER fair‑value estimate toward yuan appreciation – especially since COVID. Analysts expect the yuan to remain undervalued by roughly 19% through 2035.

The chart above illustrates just how extreme the current‑account positions of these countries have become. On a four‑quarter moving average (4qma), Taiwan’s surplus (black line) exceeds 20%, while Korea’s surplus (red line) is above 10%. China is recording its largest surplus since before the global financial crisis.The chart below shows official foreign‑exchange reserves as a percentage of GDP.

Under normal circumstances, one would expect a sharp increase in FX reserves, given that these currencies are not appreciating while current‑account surpluses are surging. The fact that this is not happening indicates that – as in China’s case – intervention is being concealed. Korea and Taiwan are operating their own “currency laundromats.”

Brad Setser’s Structural Layer: Hidden Intervention via State Banks

Brad Setser of the Council on Foreign Relations (CFR) added an important structural layer in January 2026:

China’s state banks are accumulating foreign assets at a pace of roughly $300 billion per year – at minimum. If this is treated as a form of covert currency intervention, then these operations sit just below the 2% of GDP threshold (around $400 billion) that the United States has used as the formal criterion for labeling a country a currency manipulator.

The precision of this maneuvering suggests deliberate policy rather than coincidence.

Meanwhile, official FX reserves – $3.41 trillion as of April 2026 – show no proportional increase, despite the record current‑account surplus. This is exactly what is meant by a “laundromat”: the money flows through state banks, never appearing in official reserve statistics, yet still performing the function of absorbing appreciation pressure.

Taiwan: The Most Paradoxical Case

Taiwan is experiencing an economic acceleration that can legitimately be called historic: GDP grew 7.2% in 2025, the strongest pace in a decade. Semiconductor exports (primarily TSMC) surged 32% year‑on‑year amid the AI boom, and the trade surplus doubled from $67 billion to $122 billion, reaching more than 15% of GDP. According to Natixis, Taiwan’s current‑account surplus is among the largest in the world in relative terms. Under such fundamentals, classical economics would predict a sharp appreciation of the TWD.

Instead, the currency trades near multi‑year lows. The Central Bank of the Republic of China (CBC) officially claims it does not target the exchange rate, yet market participants know well: active intervention consistently appears in the 28–29 TWD/USD zone.

The key to understanding the situation is Taiwanese insurers. They have accumulated over $700 billion in foreign assets (primarily US bonds), and 30% of that amount is unhedged. This is more than 110% of Taiwan’s GDP in the form of FX exposure. The business model works beautifully as long as the TWD is weak: companies issue policies in Taiwan dollars, invest abroad in higher‑yielding USD securities, and earn profits from both the interest‑rate differential and currency revaluation. But once the TWD strengthens sharply, the entire portfolio becomes loss‑making.

The Taiwan dollar is structurally undervalued by virtually any metric, and there are strong reasons to believe that it will eventually appreciate – which would reduce the TWD value of insurers’ foreign bonds at maturity. The current‑account surplus is already approaching 20% of GDP, driven by surging demand for AI.

What Major Banks Say in 2026

Five Conclusions to Keep in Mind

1. “Massive undervaluation” is not a metaphor but a measurable fact.

Goldman Sachs uses two independent models (GSDEER and GSFEER) and arrives at a 25% undervaluation for the CNY. CFR, and the IMF – through different methods – reach similar conclusions for the KRW and TWD. This is not a conspiracy theory but a defect of the global currency architecture that has been accumulating for 20 years.

2. The mechanism preserving undervaluation has transformed but not disappeared.

Direct central‑bank intervention has given way to operations by state banks (China), NFA accumulation through exporters and pension funds (Korea), and institutional structuring via life insurers (Taiwan). The form has changed – the essence has not.

3. G7‑Evian 2026 marks a political shift, but not a reversal.

For the first time in a long while, the issue of global imbalances has been elevated to a systemic priority for the G7. But without China at the negotiating table, without enforcement mechanisms, and amid growing internal contradictions – there is once again no communiqué. This is an important signal for long‑term positioning, but not an immediate trading trigger.

4. Revaluation will happen – the only question is the path.

Goldman projects gradual CNY appreciation toward 6.80–7.00 in 2026–2027. Setser sees mounting pressure that will eventually break the dam. The May 2025 “life‑insurer event” in the TWD (+9% in days) shows how quickly this can occur once the market decides to reassess equilibrium.