Goldman’s Yuan Conviction: Deeply Undervalued, Poised to Outperform
- admin cys
- Dec 31, 2025
- 4 min read
A Report by CYS Global Remit Counterparty Sales & Alliance Unit
CNY/SGD | 5.25 – 5.35 |
Goldman Sachs has elevated the Chinese Yuan to one of its highest-conviction foreign exchange calls for 2026, arguing that the currency’s current pricing materially understates its long-term fair value. In a note released Tuesday, analyst Teresa Alves presents a valuation-driven thesis that positions the Yuan as structurally undervalued, with appreciation potential well beyond what is currently embedded in forward markets.
Unlike cyclical FX views that hinge on near-term growth momentum or interest-rate differentials, Goldman’s case for the Yuan is anchored in persistent structural forces. Using the bank’s two formal valuation frameworks—GSDEER and GSFEER—Alves concludes that the Yuan screens as deeply discounted, supported by China’s low inflation, strong productivity dynamics, and sustained external surpluses. The implication is not merely tactical upside, but a multi-year realignment that could unfold even if near-term macro conditions remain uneven.
Deep Undervaluation on Long-Run Metrics
Goldman’s primary valuation anchor, the GSDEER (Dynamic Equilibrium Exchange Rate) model, suggests the Yuan is undervalued by roughly 25% on a weighted-average basis. The key drivers are structural rather than cyclical: persistently lower inflation and higher productivity growth in China relative to the United States. These forces have pushed the model’s estimate of fair value steadily stronger over time, a trend that has accelerated since the Covid period.
On current estimates, GSDEER places fair value for USD/Yuan near 5.00, implying an undervaluation of close to 30% versus prevailing spot levels. Crucially, Alves notes that this fair value has continued to trend lower rather than stabilising, reflecting the cumulative effect of China’s relative price dynamics and productivity performance. Goldman’s projections suggest this trajectory will persist over the next decade, meaning that even with meaningful nominal appreciation, the Yuan would remain undervalued well into the 2030s—by close to 19% in 2035 under the bank’s baseline.
Goldman’s second framework, GSFEER (Fundamental Equilibrium Exchange Rate), reinforces the message. On a real trade-weighted basis, the Yuan is estimated to be around 12% undervalued, largely due to China’s current account surplus sitting well above its long-run norm. In equilibrium models, such external imbalances naturally generate currency appreciation pressure unless offset by sustained capital outflows or policy intervention.
Goldman’s economists expect the current account surplus to widen further, supported by resilient export growth and subdued domestic demand. Even under alternative assumptions—such as a lower surplus “norm” or a larger excess—the implied FX adjustment remains meaningfully stronger than what is currently priced into forwards. From this perspective, market expectations appear misaligned with China’s external balance dynamics.
Exports, Policy, and the Case for Yuan Appreciation
A common objection to Yuan strength is the concern that appreciation would undermine China’s export competitiveness at a time when external demand remains a key growth driver. Alves directly challenges this argument, noting that the currency’s degree of undervaluation is so large that the projected appreciation would still leave the Yuan “comfortably in inexpensive territory.”
Historically, China has demonstrated an ability to sustain export growth alongside currency appreciation when productivity gains and expanding global market share offset FX headwinds. Alves draws parallels to the period following the 2005 revaluation—often referred to as “China Shock 1.0”—when the Yuan strengthened even as China’s export footprint continued to expand globally. In such environments, currency appreciation acts as a natural adjustment mechanism, absorbing part of the competitiveness gains generated by scale, efficiency, and supply-chain dominance.
In a relatively closed financial system, persistent current account surpluses also create structural appreciation pressure unless actively resisted. As Chinese firms increase their share of global trade, upward pressure on the Yuan becomes an endogenous feature of the system rather than a policy inconsistency. From this standpoint, a stronger Yuan is not at odds with export success but a by-product of it.
That said, Alves acknowledges that currency outcomes in China remain partly a policy choice. Authorities retain substantial influence over the pace and extent of appreciation through the daily fixing, capital controls, and macro-prudential tools. This policy dimension introduces uncertainty around timing, even if the valuation case is compelling. Encouragingly for Goldman’s bullish stance, recent signals suggest a gradual shift in bias. Alves highlights the consistent lean toward stronger fixings over the past year, alongside improving rolling total returns for long-Yuan positions. While not definitive, these indicators suggest a reduced willingness to actively suppress appreciation, particularly if external balances remain strong and inflation pressures subdued.
Risks and Why Goldman Remains Convicted
Goldman flags two primary risks to its Yuan view. The first is weaker-than-expected domestic demand or export performance, which could narrow the current account surplus and reduce appreciation pressure. A sharper slowdown in global trade or a deterioration in China’s competitive position would challenge the surplus-driven valuation framework.
The second risk is policy-related. Even if the Yuan is undervalued on fundamentals, policymakers may prioritise stability over adjustment, especially if currency strength is perceived to conflict with broader economic or geopolitical objectives. As such, valuation alone is not sufficient; appreciation must be tolerated, if not encouraged, by authorities.
Despite these risks, Goldman frames the Yuan as a high-conviction opportunity precisely because expectations remain low. Forward markets embed only modest appreciation, leaving significant room for upside if even part of the valuation gap begins to close. Combined with supportive carry dynamics and improving total-return characteristics, the risk-reward profile stands out relative to other major FX opportunities.
Ultimately, Goldman’s Yuan call is not predicated on a near-term cyclical rebound or rapid liberalisation. It is a structural argument rooted in relative prices, productivity, and external balances—forces that evolve slowly but exert powerful influence over exchange rates. If these dynamics persist, as Goldman expects, the Yuan’s undervaluation may become increasingly difficult for markets to ignore as 2026 approaches.
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