How Treasury Monitors Currency Manipulation When Trade Imbalances Surge

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China’s trade surplus hit $1.19 trillion in 2025. Only $160 billion of it showed up in the country’s foreign exchange reserves.

That gap—$1.03 trillion worth of exports that somehow didn’t convert into the dollars and euros central banks normally accumulate—represents more than an accounting puzzle. It exposes a fundamental problem with how the U.S. Treasury Department monitors currency manipulation: the system assumes countries pay each other in dollars, and that world is quietly disappearing.

The Treasury’s framework for identifying currency manipulators depends on tracking three things: the gap between what we buy from and sell to one country, current account surpluses as a percentage of GDP (whether a country is earning more from abroad than it spends), and most importantly, when a central bank accumulates foreign currency reserves. When a country runs a massive trade surplus, economic theory says its central bank should be buying foreign currency to prevent its own currency from strengthening. That intervention leaves a trail—bigger reserves mean the central bank was suppressing its currency’s value.

Except the evidence has disappeared.

Where the Money Went

Three explanations exist for why the trade surplus didn’t translate into reserve accumulation. First: the figures themselves might be inflated through fake shipping documents used to move money illegally. Some Chinese exporters have historically overstated shipments to move money offshore or evade capital controls. A Shanghai metals trading outlet reported that fake invoices accounted for roughly 30 percent of steel exports in 2023 and 2024. New rules took effect October 1, 2025, to crack down on this practice, but enforcement remains uncertain.

Second: the surplus might have been spent on overseas investments rather than accumulating reserves. State-owned enterprises made large infrastructure and commodities investments throughout 2025.

The third explanation fits the evidence better: most of that surplus was settled in yuan, not dollars, so it never entered the foreign exchange markets that Treasury monitors.

When an exporter agrees to receive payment in yuan instead of dollars, or when transactions settle through the Cross-Border Interbank Payment System (China’s alternative to the global dollar-based payment system) instead of SWIFT, the traditional signals disappear. No foreign exchange market transaction occurs. No central bank intervention is necessary. The surplus exists in goods and services, but it creates zero additional foreign currency reserves.

The Three-Part Test That No Longer Captures Currency Dynamics

Congress established the current framework in the Trade Facilitation and Trade Enforcement Act of 2015. The country technically exceeds the current account threshold—the IMF estimates it reached approximately 3.3 percent of GDP in 2025. But the test which looks at whether central banks buy or sell currency no longer captures what’s happening.

When the framework was designed, almost all international commerce settled in dollars. An exporter selling goods to the United States received dollars, which flowed into the exporter’s bank account. When that bank converted dollars to yuan to pay suppliers, it accessed the foreign exchange market, creating pressure making the yuan worth more. To prevent appreciation, the People’s Bank would sell yuan and buy dollars, accumulating dollar reserves. Every step was visible and quantifiable.

When that same exporter receives settlement in yuan, or when the transaction flows through a Hong Kong subsidiary conducting business in yuan, we can no longer see evidence of currency reserves building up. The surplus still exists. The competitive advantage still exists. The Treasury’s ability to measure it does not.

Alternative Payment Systems and Digital Currency Infrastructure

Project mBridge lets central banks exchange currencies directly with each other, connecting central banks in Hong Kong, Thailand, the UAE, and Saudi Arabia. It processed more than 4,000 transactions worth approximately $55.49 billion by late 2025—a 2,500-fold increase from early pilots in 2022. Almost all transactions on this platform used the digital currency.

When the People’s Bank and Thailand’s central bank settle a transaction using their respective digital currencies on mBridge, the transaction occurs directly between central bank accounts. No private banks act as middlemen. No international banking messages are sent. No reserve accumulation through conventional foreign exchange markets. From Treasury’s perspective, the transaction is invisible. It doesn’t appear in foreign reserve statistics, doesn’t trigger foreign exchange market activity, and doesn’t reveal itself through the quantitative indicators Treasury monitors.

The Cross-Border Interbank Payment System (CIPS) grew to include hundreds of participants across more than 160 countries by 2025. Major international banks increasingly settle customer transactions in yuan when both buyer and seller have yuan accounts available, eliminating the need for using dollars as the middleman in a transaction.

Why Tariffs Failed to Force Currency Rebalancing

The Trump administration’s tariff strategy, implemented beginning April 2025, was based on an unstated assumption: raising the cost of imports would pressure acceptance of currency revaluation. Make exports expensive enough, and the country would have to let the yuan depreciate to restore competitiveness, or allow appreciation to reduce the surplus.

Instead, the 2025 surplus expanded to record levels. Exporters successfully redirected shipments to markets outside the United States. Exports to ASEAN increased 13.4 percent year-on-year, to Africa 25.8 percent, to the European Union 8.4 percent, and to India 12.8 percent. These gains substantially offset declining U.S. sales.

The more fundamental issue: tariffs assumed that pressure would manifest as currency pressure. That assumption only holds when settlement occurs in dollars. When exporters receive yuan payment or settle in alternative currencies, they’re insulated from dollar exchange rate movements. The exporter’s revenue in yuan terms remains stable. The exporter’s costs in yuan terms remain stable. Tariff-induced changes in dollar exchange rates don’t affect competitiveness.

The Treasury Department’s monitoring frameworks haven’t been updated to account for this reality. Even if the Trump administration successfully pressured the People’s Bank to allow yuan appreciation, the resulting change might not reduce the trade surplus as hoped if exporters simply shift to non-dollar settlement.

What Treasury Sees and What It Doesn’t

Treasury officials monitor foreign exchange reserves through official People’s Bank statistics, which showed reserves increased by approximately $160 billion during 2025 to reach $3.36 trillion. That’s a substantial increase in absolute terms. It’s also dramatically inconsistent with a $1.19 trillion surplus.

The agency also tracks the current account surplus relative to GDP—the 3.3 percent exceeds the 3 percent threshold that warrants investigation. And Treasury analyzes evidence of central bank intervention in foreign exchange markets, examining the People’s Bank’s daily fixing of the yuan’s central parity rate against the dollar.

What Treasury doesn’t see: what currencies are actually used to pay for these transactions. Official statistics on this remain unavailable. The agency doesn’t have direct visibility into mBridge transaction volumes or CIPS settlement flows. And it lacks systematic data on how much of the surplus represents yuan-denominated transactions that never touch dollar markets.

Throughout the post-World War II era, because countries held dollars as savings, their actions were visible. When countries accumulated dollar reserves or ran surpluses settled in dollars, their actions appeared in Federal Reserve data, Treasury balance sheet statistics, and Bank for International Settlements tracking. That transparency facilitated multilateral monitoring and policy coordination.

As non-dollar settlement mechanisms proliferate, that transparency erodes. If 60 percent of payments settle in yuan, 20 percent in euros, and 20 percent in other currencies, global financial authorities lack a single window into the complete picture.

Competition Over Financial Infrastructure

This is really about competition to build alternative payment systems, not conventional currency manipulation aimed at exchange rate advantages.

People’s Bank Governor Pan Gongsheng articulated this explicitly in a June 2025 speech, placing the digital yuan within the vision for a “multipolar international monetary system” that would reduce using currency systems as political weapons during geopolitical tensions.

The strategic intent is clear: reduce the centrality of the dollar and thereby constrain U.S. leverage over financial policies. For decades, U.S. financial hegemony rested on the dollar’s role as the world’s dominant reserve currency and settlement medium. This dominance generated substantial benefits—the United States could borrow cheaply because foreigners demanded dollar assets, American firms enjoyed advantages in financial services, and U.S. authorities wielded extraordinary control over international financial flows through the ability to impose sanctions and freeze dollar transactions.

The strategy focuses on reducing dependence on this dollar-dominated system by promoting yuan internationalization as an alternative for settlement, reserve holdings, and long-term investments. If currency internationalization represents competition over financial system architecture rather than conventional manipulation, then applying detection criteria designed for the latter may systematically misidentify objectives.

A central bank promoting its own currency for international settlement through infrastructure development might not be manipulating the exchange rate in the technical sense. It might accept appreciation, depreciation, or stability depending on domestic economic conditions. Rather, it’s manipulating the international monetary system itself by making alternative settlement paths available that reduce dollar reliance.

International Views on Yuan Valuation

There’s broad international agreement that the yuan’s value relative to fundamental economic conditions requires adjustment. The International Monetary Fund noted in its latest regular economic review that compared to past patterns, the yuan seems worth less than it should be and that appreciation would contribute to more balanced global flows. European Union officials have indicated similar views.

Some economists argue the yuan remains undervalued by as much as 15-25 percent in real terms (accounting for price changes and how much each country produces per worker). Morgan Stanley projected yuan appreciation to approximately 6.85 per dollar in the first quarter of 2026, citing strong export growth and U.S. dollar weakness.

Other analysts contest whether currency revaluation alone would significantly rebalance given the structural nature of the surplus. The surplus reflects not exchange rate policy but deep structural factors: excess manufacturing capacity, state subsidies for export-oriented industries, barriers to imports of competitive foreign products, and weak domestic consumption relative to production capacity due to property market collapse and high household savings rates.

From this perspective, yuan appreciation would reduce the surplus’s magnitude but wouldn’t address its fundamental causes. The country could simply redirect exports to other markets at lower price points, or increase domestic hoarding through further reductions in imports.

Beijing itself has been reluctant to allow rapid yuan appreciation. The People’s Bank fears that yuan appreciation would exacerbate deflation by making Chinese exports more expensive in foreign currency terms, reducing foreign demand and further depressing domestic profit margins and corporate investment. The PBOC reduced policy interest rates in January 2026 to stimulate credit demand, but broader deflationary pressures persisted from structural overcapacity.

Policymakers also view yuan internationalization as a strategic priority requiring the currency to be perceived as relatively stable and potentially appreciating—characteristics that make it attractive to foreign central banks and private investors seeking to diversify from dollars. Large, rapid appreciation might attract investors quickly moving money in and out chasing profits that destabilize the exchange rate and disrupt the internationalization strategy.

Potential Treasury Responses

Congress could amend the Trade Facilitation and Trade Enforcement Act to incorporate alternative metrics of currency undervaluation not dependent on reserve accumulation or dollar flows. These might include comparing what the same goods cost in different countries, comparing what a currency can buy in different countries, or current account thresholds independent of surplus magnitude. Such amendments would require careful drafting to avoid unintended consequences.

Treasury could expand its informal surveillance of alternative payment systems to gather data on non-dollar settlement practices and yuan internationalization. Currently, Treasury likely receives fragmented information about CIPS volumes, mBridge transactions, and digital yuan adoption through Federal Reserve contacts and reporting by American financial institutions. Formalizing this information collection through regulatory requirements on U.S. banks and coordination with allied central banks could provide better visibility.

Treasury might focus instead on the underlying causes of the surplus rather than focusing exclusively on currency manipulation. If the surplus reflects industrial overcapacity, subsidies, import barriers, and weak consumption rather than exchange rate manipulation, then diplomatic pressure for yuan appreciation would address symptoms rather than causes. Instead, Treasury might coordinate with other agencies to target these structural factors through negotiations and investment screening.

Treasury and the Federal Reserve could expand participation in arrangements like mBridge to gain visibility into alternative settlement platforms and potentially influence their governance. Currently, mBridge excludes U.S. authorities entirely, which limits American leverage over how the platform evolves. If the United States participated, either directly or through an alternative arrangement among countries that use the dollar in their financial system, American officials could better monitor flows and ensure safeguards against illegal financial activity.

Finally, Treasury might need to reconsider what it is trying to accomplish in an environment of currency internationalization. If the goal is preventing exchange rate manipulation for advantage, the traditional three-part test remains relevant. But if the goal is maintaining sufficient U.S. leverage over the international financial system to serve national security and economic objectives, Treasury’s focus might need to broaden to encompass how currencies compete for global usage regardless of manipulation per se.

The Strategic Vulnerability

The $1.19 trillion surplus combined with only $160 billion flowing into foreign exchange reserves shows that Treasury’s tools were built for a financial system that no longer exists—one where flows through dollars and leaves quantifiable traces in reserve accumulation statistics.

The divergence between surplus magnitude and reserve accumulation reflects deliberate policy choices to internationalize the yuan and develop non-dollar settlement infrastructure. These changes have been underway for over a decade but have now reached sufficient scale to fundamentally alter how commerce translates into currency accumulation and monetary policy signals.

The Trump administration’s tariff strategy encountered an adversary capable of partially insulating itself from tariff impacts through settlement currency choices. Traditional monetary and policy levers prove less effective precisely because countries are transforming the financial infrastructure that those policies depend on through mechanisms that fall outside conventional policy frameworks.

Whether Treasury responds by amending its statutory criteria, expanding surveillance of alternative payment systems, or fundamentally reorienting its understanding of what constitutes currency manipulation remains unclear. What’s certain is that the agency cannot indefinitely continue applying a monitoring framework designed for dollar-dominant commerce to an environment where countries are competing by building alternative payment systems instead of manipulating exchange rates.

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