Goldman Sachs, a prominent voice on Wall Street, has stated that the Chinese yuan is currently trading approximately 25% below its fair value. The bank anticipates stronger gains for the currency by 2026 than what current forward contracts suggest.
Goldman Sachs has identified the yuan as one of its highest-conviction trades, asserting that its valuation does not align with the economic conditions necessary to support a stable current-account balance, consistent prices, and sustained growth.
The bank noted that the yuan is on track for its first annual rise since 2021 in both onshore and offshore markets. This appreciation is attributed to a weaker U.S. dollar, increased equity inflows into mainland China, broader international adoption of the currency, and firmer daily fixings.
However, Goldman Sachs also acknowledged that certain conditions, such as a soft economy, noticeable deflation, potential dollar strength, and weaker export performance, could still exert downward pressure on the yuan.
Goldman Sachs Disputes Claims of Export-Driven Weakness
In a note dated December 9, Goldman strategist Teresa Alves expressed disagreement with the argument that the undervaluation of the Chinese yuan is a primary driver of the competitiveness of Chinese exports. Alves stated that the currency is "so deeply undervalued, the strengthening we project would still leave the currency comfortably in inexpensive territory."
Alves's commentary emerged amid growing debate about whether Beijing is deliberately keeping the yuan weak to navigate trade uncertainties.
The International Monetary Fund has previously linked China's increasing exports and expanding surplus to the real depreciation of its currency and has advocated for a move toward a freer exchange rate.
This discussion has intensified following reports that China's goods trade surplus surpassed $1 trillion in the first eleven months of the year. Governments concerned about industrial overcapacity have voiced opposition to the rising volume of Chinese goods entering their markets.
Goldman Sachs suggested that countries experiencing a loss of market share might respond by allowing their own currencies to decline, which would consequently improve the yuan's relative standing within China's trade basket. Teresa Alves also highlighted that China's current-account strength contributes to upward pressure on the yuan.
Goldman Sachs Models Indicate Significant Mispricing
According to Goldman Sachs' Dynamic Equilibrium Exchange Rate (GSDEER) model, the fair value of the yuan is estimated to be around 5 per U.S. dollar, while the currency was trading at approximately 7.06 on Wednesday. The bank's Fundamental Effective Exchange Rate (GSFEER) model, which links currency values to the current account, indicates that the yuan is currently 12% undervalued.
Goldman Sachs reported that the weighted average of these two models places the yuan 25% below its fair value. Forward contracts for the fourth quarter of 2026 price the offshore yuan at approximately 6.91, which is roughly 2% stronger than its current level.
Across Asia-Pacific markets, traders were analyzing China's inflation figures while awaiting the U.S. Federal Reserve's policy decision.
Hong Kong's Hang Seng Index saw a slight increase of 0.22%, while China's CSI 300 closed 0.14% lower at 4,591.83. This occurred as consumer prices in China rose by 0.7% year-on-year, marking the highest increase since February of the previous year, following a 0.2% rise in October. This gain met the forecast from a Reuters poll.
China's factory-gate prices fell by 2.2% in November compared to a year earlier, extending a deflationary trend after a 2.1% drop in October.
Australia's S&P/ASX 200 remained largely unchanged, trading at 8,579.40. Japan's Nikkei 225 slipped 0.1% to 50,602.8, while the Topix rose 0.12% to 3,389.02. South Korea's Kospi declined by 0.21% to 4,135, while the Kosdaq climbed 0.39% to 935.