Goldman Sachs: Resilient CNY Amid Dollar Strength and Persistently Low China Rates
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Goldman Sachs highlights rising China growth concerns driven by notably weakening domestic demand, yet expects only a limited broad-based easing response. May data showed retail sales declining 0.6% year-on-year and fixed-asset investment falling 10.6%, suggesting April–May real domestic demand growth may have slowed to just 1–2%. Consequently, second-quarter real GDP faces downside risk of falling below 4.5% year-on-year.
Despite this weakness, the 4.5–5.0% growth target range grants policymakers tolerance for short-term softness, keeping the policy reaction function reactive rather than proactive. Support will likely materialize through accelerated fiscal deployment, ample interbank liquidity, and targeted credit.
On currencies, despite the US Dollar Index rising approximately 2% in June, the yuan depreciated only marginally against the dollar. The CFETS basket actually appreciated around 2%, demonstrating that policy anchors continue to favor CNY resilience. Over the summer, USD/CNY is expected to trade range-bound. Exporters' foreign exchange settlement should limit any upside in the pair.
Regarding rates, weak domestic demand and falling oil prices keep rates low, particularly at the front end, supported by ample liquidity. However, accelerated ultra-long government bond supply in the third quarter will constrain long-end yields. Goldman expects the 10-year sovereign yield to range-bound at low levels, while the 10s-30s curve remains relatively steep.
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