Goldman Sachs has identified the Chinese yuan as significantly undervalued, estimating it is between 20% and 30% lower in value compared to the US dollar. This evaluation is one of the firm’s leading trade ideas as they look forward to 2026. The bank anticipates a gradual strengthening of the yuan, setting forecasts for the USD/CNY exchange rate at 6.80 over the next three months, 6.70 in six months, and 6.50 within a year.
What models is Goldman Sachs using to reach this conclusion? The firm employs two key proprietary frameworks. One is the Goldman Sachs Dynamic Equilibrium Exchange Rate model, which suggests the yuan's fair valuation should be around 5.00 USD/CNY. Currently trading conditions indicate a discrepancy of about 30%. The second framework is the Goldman Sachs Fundamental Equilibrium Exchange Rate model, focusing on current account dynamics and suggesting a more modest undervaluation of approximately 12%.
Why is the yuan considered inexpensive by analysts? The anticipated increase in China's current account surplus, fueled by robust export performance across various sectors, plays a crucial role. Chinese manufacturers are currently leading in vital industries, including electric vehicles, solar panels, and consumer electronics. In contrast, domestic demand remains tepid, creating a scenario where strong exports combined with lower imports enhance the current account surplus.
Moreover, low inflation in China contributes to this undervaluation. While Western economies face high consumer prices, China is experiencing near-deflationary conditions. This phenomenon further erodes the nominal exchange rate, indicating greater undervaluation of the yuan in purchasing power terms.
Despite the projected appreciation over the next year, estimates indicate that by 2035, the yuan could still be around 19% undervalued according to the GSDEER model. Historically, Beijing has closely monitored the yuan's exchange rate to avoid rapid increases that could negatively affect exporters. The People's Bank of China enforces daily reference rates to help maintain stability within a specified range.
What implications does this have for investors? Goldman’s analysis presents a clear opportunity for those looking to capitalize on currency movements. If the yuan appreciates to 6.50 USD/CNY over the next twelve months, it would signify a considerable increase in value. However, risks remain. Escalating US-China trade tensions or strategic actions by Beijing to weaken the yuan could impact its valuation, posing a risk for investors.