Goldman Sachs: The RMB is undervalued by 25% on a trade basis
The RMB's exchange rate against the US dollar will inevitably appreciate throughout 2025, marking the first annual increase since 2021.
All institutions believe that the undervaluation of the RMB has played a significant role in exports. When the trade surplus exceeded $1 trillion, global public opinion reached a turning point, and the idea that the RMB was significantly undervalued suddenly became a consensus. The IMF has also issued a warning that the undervaluation of the RMB leads to trade tensions. The question is, how much is the RMB undervalued?
Goldman Sachs' Dynamic Equilibrium Exchange Rate (GSDEER) believes that the exchange rate will eventually reflect differences in productivity and trade conditions, and the fair value of the RMB should be 5. This is an estimate based on productivity, which can serve as an upper limit for the RMB's value.
Goldman Sachs' Fundamental Effective Exchange Rate (GSFEER) framework, which tracks the impact of the current account on the exchange rate, found that the RMB is undervalued by 12%. This is an estimate based on finance, which can serve as a lower limit for the RMB's value.
The weighted average of the two models shows that the RMB is 25% below its fair value. It's just calculated this way, some mathematical formulas, resulting in a number at the end.
It is certain that the RMB must appreciate. The forward contract exchange rate for the offshore RMB market in the fourth quarter of 2026 is 6.91, and from the current news and public opinion, this definitely underestimates the extent of the RMB's appreciation.
But no matter how it fluctuates, the decisive force is the central bank, which determines the exchange rate. The central bank is willing to maintain a significant undervaluation of the RMB because of the needs of the export sector, and the power is growing larger.
Original: toutiao.com/article/1851174689065225/
Statement: This article represents the views of the author himself.