China’s exports fell 14.6% year over year in March. This doesn’t bode well for Wednesday’s release of China’s first-quarter gross domestic product (GDP) numbers. Exports are approximately 26% of China’s GDP, though that is down from nearly 40% of GDP in 2006. A big drag on China’s exports has been the stronger dollar.

How does a stronger dollar affect China’s exports? Through the renminbi (RMB), which the Chinese government pegs to the dollar.

When it comes to exports, the U.S. is an important trading partner, but so is the eurozone. As of the end of 2014, Europe and North America were neck and neck in terms of export share (17.4% and 17.9% of China’s exports, respectively).

China Export Share

China imports more from Europe than North America (14.2% versus 8.2% of GDP, respectively), so China could get a double benefit from weakening the RMB versus the dollar: It would help China’s export competitiveness relative to Europe, and it would help move China closer to its 3.0% inflation target (currently, inflation is running at 1.4%).

If China weakens its currency relative to the dollar, that entails the Chinese government buying more U.S. Treasury securities (buying dollars to weaken the RMB means buying Treasuries). This could help strengthen the dollar a bit relative to the euro, as there would be more net buying of dollars. For U.S. investors, meanwhile, China’s actions could keep Treasury yields low even as we approach the Federal Reserve’s liftoff of interest rates.

Despite China’s export weakness, investors should have little to fear. Currency policy is another lever the Chinese government has at its disposal, in addition to monetary and fiscal policy, to help achieve its economic objectives.

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