Goldman Sachs Challenges Overestimated Yuan Repatriation Risks Amid Weak Chinese Economy

Goldman Sachs has pushed back against claims of a significant risk from Chinese companies converting their foreign dollar reserves into yuan. The bank’s analysts, including Xinquan Chen, argue that the actual amount of dollar hoarding by Chinese exporters since mid-2022 is around $400 billion, which is lower than some market estimates. They attribute recent yuan strength more to external factors such as shifting expectations about U.S. Federal Reserve rate cuts and political uncertainties rather than substantial repatriation.

The yuan has gained approximately 2% in August, reversing earlier losses and improving its 2024 performance by about 0.7% against the dollar. This rally comes amidst signs of corporate buying and broad dollar weakness. Analysts from Eurizon SLJ Capital and Barclays Plc have suggested potential inflows ranging from $100 billion to $1 trillion, but Goldman Sachs views these figures as overstated.

Despite the yuan’s recent appreciation, Goldman Sachs forecasts that China’s weak domestic economic fundamentals will likely weigh on the currency in the medium term, causing it to underperform compared to major peers. This is in contrast to Eurizon’s Stephen Jen, who predicted that repatriation could strengthen the yuan by up to 10%.

HSBC Holdings strategist Jingyang Chen has expressed skepticism about a rapid surge in yuan gains, citing China’s sluggish growth and cautious fiscal policy. HSBC estimates that Chinese companies have accumulated around $220 billion in dollar assets over the past two years.

The yuan’s recent gains have been partly driven by the collapse of carry trades, which led investors to repay loans in lower-yielding currencies. Goldman Sachs maintains that the high returns from U.S. assets continue to incentivize Chinese firms to hold onto their dollars unless there is a significant shift in carry trade dynamics or a clear downtrend in the dollar.