Goldman: Yuan 20-25% undervalued, appreciation underestimated

If Beijing tolerates a gradual climb in the yuan, the effect would spread across Asian currencies, with those most linked to China's trade cycle likely to gain from a stronger regional anchor. A yuan that firms against the euro and dollar would reduce some trade frictions while eating into Chinese exporters' margins, tilting the advantage toward businesses in high-value technology and domestic consumption. For overseas investors, the anticipated currency gains would add an extra return on Chinese holdings, possibly steering money into onshore bonds and equities. The chief threat to that outlook is the US dollar, which remains buoyed by geopolitical frictions and persistent inflation; a renewed oil-price spike from an Iran war that keeps the Federal Reserve hawkish could hold back the yuan.

Goldman believes the yuan is among the most undervalued wagers in currency markets, and that China's leadership is quietly warming to allowing it to appreciate.

• Bloomberg gated reported that Goldman's Kamakshya Trivedi regards a firmer yuan as among the most underpriced scenarios in the world's FX markets.
• He called the bank's estimated 20-25% undervaluation conservative, adding that the figure would appear far larger after weighing China's current account and external balances.
• Goldman sees the yuan reaching 6.40 per dollar within a year, from around 6.69 now, while fair-value measures suggest a drop below 7 could eventually be followed by a level starting with a six.
• China's trade surplus exceeded $800 billion in January-August, as European and other counterparts accuse Beijing of maintaining an artificially weak currency, which Beijing denies.
• Trivedi said Chinese authorities may be increasingly comfortable with appreciation, to secure stable trade relationships and bolster the yuan's international use.
• The yuan touched a four-year high versus the dollar and has advanced more than 8% against the euro this year.

Goldman Sachs' Kamakshya Trivedi says a stronger yuan is one of the least fairly priced outcomes in global FX, and that markets are not fully accounting for how much the currency might advance, per Bloomberg.

Trivedi, who leads Goldman's global FX, rates and EM strategy research, said the firm pegs the yuan's undervaluation at roughly 20-25%, which he termed a cautious estimate. Once China's current account and wider external position are factored in, the shortfall would appear considerably bigger, and the expanding trade surplus reinforces the argument for a higher yuan, he added. Government figures put the surplus above $800 billion for January-August.

In an interview with Bloomberg last week, Trivedi said Goldman projects the yuan at 6.40 per dollar a year from now, compared with roughly 6.69 today, and its fair-value models point to a future level beginning with a six. The currency was last seen around 6 per dollar in early 2014, during a period of strong speculative inflows. Trivedi expressed surprise that market consensus and forward pricing have repeatedly failed to match Goldman's upward forecast revisions. He expects the climb to be steady and long-lasting.

The forecast arrives as China draws increased criticism from trade partners such as Europe for allegedly holding the yuan artificially low to support exports. Beijing dismisses these assertions, contending that currency shifts cannot resolve structural distortions in the world economy and that export vigour stems from improving industrial sophistication. Even so, Chinese officials have permitted the carefully controlled yuan to climb against most key counterparts, reaching a four-year peak versus the dollar. Against the euro, it has risen by over 8% so far this year.

According to Trivedi, Chinese policy makers might be increasingly at ease with more yuan strength, in part because they value stable trade ties. China reduced broader EU tensions by pledging to limit hybrid vehicle exports following discussions that concluded Friday. The greater comfort also stems from an export base now more reliant on advanced manufacturing and tech, sectors that need less support from a weak exchange rate.

A firmer yuan is consistent with President Xi Jinping's ambition to create a robust currency that is broadly used in commerce, investment and FX trading and holds reserve status. Trivedi said steady, moderate appreciation would support that internationalisation objective and boost the appeal of Chinese asset returns. How quickly the dollar bounces, buoyed by geopolitical strains and persistent inflation, will largely determine the speed of that journey.