Goldman Sachs Chief China Economist Hui Shan: Strong Exports Not a Price-for-Volume Trade, RMB to Appreciate 'Slowly' Against the Dollar

On September 18, the RMB exchange rate reached an important breakthrough, with both the onshore and offshore yuan breaking above the 6.7 mark against the US dollar. So far this year, the yuan has appreciated more than 4% against the dollar, while the CFETS RMB Index, which measures the currency against a basket of trading partners, has risen nearly 3.6%.

Alongside the yuan's strength, China's imports and exports have defied the conventional script. In value terms, total trade has exceeded 4.5 trillion yuan for three consecutive months; in growth terms, both exports and imports have posted double-digit gains for four straight months. The old playbook in which currency appreciation suppresses exports is no longer playing out; instead, a stronger yuan has not dented the resilience of imports, exports and the trade surplus.

Hui Shan, Goldman Sachs' chief China economist, said in a recent interview with Securities Times that China's real export growth is deeply rooted in the country's broad manufacturing competitiveness, with strong overseas demand another contributing factor. Looking ahead, she expects the dollar to depreciate gradually over the next few years, while China's inflation will stay below that of some major overseas economies - conditions under which the yuan can appreciate slowly and moderately against the dollar without materially hurting China's relative manufacturing competitiveness or its share of global manufacturing.

Securities Times: In August, China's total goods imports and exports grew 19.8% year on year, with exports of green products such as new energy vehicles and lithium batteries expanding rapidly. Goldman Sachs has raised its forecast for China's full-year export volume growth once again. What do you see as the main drivers of August's high trade growth?

Hui Shan: Overall, Chinese exports have remained strong this year, showing the broad competitiveness of China's manufacturing sector. Electrical equipment and machinery other than AI-related products are still the largest contributors, while solar cells, electric vehicles and lithium batteries have become increasingly important growth sources: they account for nearly 5% of nominal exports but have contributed roughly 1.5 to 2 percentage points to real export growth in recent quarters, almost on par with furniture, home appliances and apparel.

Securities Times: Some attribute China's export competitiveness to 'trading price for volume.' Does that argument hold up?

Hui Shan: The strength of Chinese exports cannot simply be put down to selling cheap to gain volume. Although some countries and regions have launched anti-dumping investigations into products imported from China, it matters first to be clear about what anti-dumping actually means: exporting below cost. In reality, many Chinese export products are now priced higher than their domestic sales, which is also visible in the financial reports of domestic listed companies with overseas businesses - their overseas margins are often higher than domestic ones. It has little to do with dumping.

A country's export strength boils down to three factors. First, strong production capacity: if you produce the same products at lower cost than others, your products will be attractive. Second, strong overseas demand: supported by increased AI-related capital spending, major economies including the US are performing better than expected. Research also shows that China's export growth is supported by resilient final demand in emerging market economies: between 2019 and 2024, emerging markets absorbed about 7 percentage points more Chinese value added, of which consumption contributed about 6 points - indicating that China's exports to these markets are largely underpinned by genuine local demand. Third, domestic demand also exerts some influence on exports.

Securities Times: As US long-term Treasury yields keep rising, the inversion of the China-US interest rate spread has deepened, yet the yuan is still appreciating against the dollar. What explains this contrast?

Hui Shan: The relationship between interest rate differentials and exchange rate movements is not a fixed linear one. While US Treasury yields keep climbing, the weakness of the dollar index should not be overlooked. In fact, it is not just the yuan - the yen and the Korean won have also appreciated against the dollar recently, and many Asia-Pacific currencies have strengthened against the dollar as well.

Securities Times: Goldman Sachs' latest report expects a gradual, moderate appreciation of the yuan against the dollar over the next few years, and suggests that an annual appreciation of 3%-5% would allow China to achieve both manufacturing competitiveness and RMB internationalization. What are the main reasons you expect the yuan to appreciate moderately?

Hui Shan: From a fundamentals perspective, China runs a large annual trade surplus and its products' competitiveness keeps improving, which will sustain a current account surplus and a steadily stronger currency. However, if a currency appreciates too fast, it will hurt the economy considerably in the short term - suppressing exports and importing deflationary pressure - which is bad for economic and financial stability.

Therefore, under our scenario assumptions, if the yuan appreciates against the dollar at an annual pace of 3%-5%, combined with our expectation that the dollar index will follow a slow weakening trend, the yuan can appreciate moderately against the dollar while remaining broadly stable or slightly stronger against a range of other currencies.

This pace of appreciation puts relatively little pressure on exports and on domestic economic and financial stability - an optimal solution within a controllable range. If markets come to expect such appreciation to persist, it would offset China's relatively low government bond and related bond yields, and may help international investors hold RMB assets. Currency appreciation also helps narrow the GDP gap with the US at market exchange rates. This pace roughly matches one-year forward pricing, which can reduce the attractiveness of speculative positions arbitraging in either direction.

It should be stressed that, from the standpoint of Chinese household welfare and global rebalancing, we see a better policy option as combining appreciation with stronger support for expanding domestic demand - the two reinforcing each other. Through demand-side policies, domestic demand and market expectations can be continually lifted, while supply-side structural reform can make some parts of supply more optimized rather than repetitively built, which can steadily strengthen the momentum of domestic demand.