China should let its currency appreciate gradually to safeguard against foreign protectionist moves and boost spending to support domestic demand to meet its economic growth targets, according to Goldman Sachs economists.
Data in the first half of 2026 continued to paint a picture of a bifurcated Chinese economy – with weak domestic demand and strong exports – which has led to a renewed debate over whether policies to support demand or nominal currency appreciation are the right response, Goldman Sachs economists Kamakshya Trivedi and Hui Shan said in a Wednesday research note.
“A gradual exchange-rate appreciation should help facilitate a return to external balance and mitigate protectionist pressures from the rest of the world,” they said, adding that the yuan nominal exchange rate was about 20 per cent undervalued.
China’s trade surplus hit an all-time high of nearly US$1.2 trillion last year, and in June it widened by US$126 billion.
China’s exports have remained resilient this year despite headwinds from the US-Israel war on Iran, supported by the global technology cycle and strong demand for renewable energy products amid the energy shock.
Protectionist trade policies from the US, among other countries, have eroded demand for some Chinese exports. Beijing also called on the country to “promote more balanced trade development” after a meeting of the Communist Party’s Politburo, a major decision-making body led by President Xi Jinping, last week.