Goldman Sachs believes that, given the current competitive valuation level of the RMB, relying on alternative policy tools to mitigate the drag of trade on growth is a more feasible approach than currency depreciation. RMB appreciation could benefit Chinese equities through accounting, fundamental, risk premium, and portfolio flow channels; a 1% appreciation could drive a 3% rise in the stock market, with consumer discretionary, real estate, and brokerage stocks outperforming.
Goldman Sachs asserts that RMB appreciation will boost Chinese stocks, with a 1% rise potentially lifting the market by 3%. In a scenario of RMB strength, consumer discretionary, real estate, and brokerage stocks are expected to perform well. According to official announcements from the Ministry of Commerce, the recent high-level economic and trade talks between China and the U.S. yielded substantive progress, significantly reducing bilateral tariffs. The U.S. canceled 91% of its imposed tariffs, while China reciprocated by removing 91% of its retaliatory tariffs. Additionally, the U.S. suspended 24% of its “reciprocal tariffs,” and China followed suit. As reported by Baidu, Goldman Sachs noted in its May 26 report that the RMB has shown remarkable resilience during the latest round of Sino-U.S. trade tensions. Unlike the 13% depreciation against the USD between March 2018 and January 2020, the RMB has appreciated by 1% against the USD since April 2. Alternative policy tools are deemed a superior solution for maintaining RMB resilience. Common explanations include the central bank’s currency management, improved competitiveness and diversification of China’s export sector compared to 2017, potential undervaluation of the RMB, broad USD weakness, and resulting investor demand for diversification away from USD assets. In terms of exports, China’s direct trade and income exposure to the U.S. has declined over the past decade. The U.S. market accounted for approximately 15% of China’s exports and 1.2% of listed companies’ revenue in 2024, down from 19% and 1.6% in 2017, respectively. Goldman Sachs’ FX team recently revised its USD/CNY forecast downward (implying RMB appreciation), expecting the exchange rate to reach 7.20, 7.10, and 7.00 in 3, 6, and 12 months, respectively. This suggests a 3% appreciation over the next year. Analysts argue that, at current competitive valuation levels, alternative policy tools—such as export diversification to non-U.S. emerging and developing markets and stronger fiscal stimulus to boost domestic demand—may be more effective in alleviating trade-related growth drag. A 1% currency appreciation could drive a 3% stock market rise. Goldman Sachs highlights empirical data showing that Chinese stocks tend to perform well during currency appreciation, with equity returns positively correlated to RMB exchange rates (both bilateral and basket-based).Specifically, since 2012, the average FX/equity correlation and beta have been 35% and 1.9, respectively, indicating that stocks traded positively 66% of the time when the RMB strengthened. Conceptually, RMB appreciation could benefit Chinese equities through accounting, fundamental, risk premium, and portfolio flow channels.
First, China stocks listed offshore are quoted in HKD or USD but have RMB as their functional currency. When the RMB appreciates, their earnings and book value should rise, generating translation gains and more attractive equity valuations. Second, Chinese companies with USD-denominated debt (or USD cost bases) or short USD assets should benefit from FX gains when the USD weakens. Third, RMB appreciation typically reflects and accompanies stronger cyclical fundamentals in China relative to trading partners, which supports growth and equity return expectations. Finally, moderate RMB appreciation should help alleviate capital outflow concerns, thereby benefiting equity risk premiums (ERP) and portfolio flows. Goldman Sachs estimates that, all else equal, a 1% RMB appreciation against the USD could lift Chinese stocks by 3%, including translation effects. ~~~~~~~~~~~~~~~~~~~~~~~~ The above insightful content is sourced from Baidu. For more detailed analysis, including real-time insights and frontline research, consider subscribing to [Baidu Annual Membership], a joint offering by Baidu and Wisdomburg. Risk Disclosure and Disclaimer: Markets involve risks, and investments should be made cautiously. This article does not constitute personal investment advice nor considers individual users’ specific investment objectives, financial situations, or needs. Users should evaluate whether any opinions, views, or conclusions herein align with their circumstances. Investments made accordingly are at the investor’s own risk.
