Goldman Sachs: Inflation Continues to Rise; Bullish on RMB and Chinese Equities

Overview

This report outlines three core issues currently focused on by Goldman Sachs' macro research team: sustained global inflation heating up, the geopolitical impact of the Trump-Xi meeting, and beneficiaries under the AI investment boom. The report argues that inflation pressures in major economies are higher than expected due to energy prices, tariffs, and AI-related cost pushes, leading to strengthened expectations for tighter monetary policy. Geopolitically, although a comprehensive China-US agreement is difficult, tactical trade arrangements are expected to support RMB strength and Chinese asset performance. Furthermore, AI investment not only benefits hardware manufacturing nations (Taiwan, South Korea) but intangible asset investments will also reshape the corporate competitive landscape.

Core views

Inflation: US April CPI and PPI data exceeded expectations; coupled with rising oil prices due to the Iran conflict, tariff policies, and AI-related price pressures, US inflation is expected to remain elevated in the coming months. Full-year core PCE inflation will be closer to 3% rather than the 2% target. Given strong labor market data and rising hawkish sentiment within the Fed, Goldman Sachs has delayed its forecast for the last two rate cuts to December 2026 and March 2027, and raised its year-end 2026 forecasts for 2-year and 5-year US Treasury yields to 3.40% and 3.65%, respectively. Similarly, China's April inflation data also exceeded expectations due to higher oil prices, with the 2026 overall PPI inflation forecast raised to 2.0%; the Eurozone core inflation peak is expected to be delayed to Q2 2027, reaching 2.7%. Geopolitics and Asset Performance: The Trump-Xi meeting is expected to focus on narrow issues such as trade and export controls, including tariffs, Chinese purchases of US goods, and export restrictions on rare earths and semiconductors. Goldman Sachs assumes China will increase purchases of US agricultural products, energy, and aircraft in exchange for the US not raising tariff rates. Although the likelihood of a comprehensive 'grand deal' is low, this meeting could serve as a tactical catalyst for RMB and Chinese equity strength. Based on China's strong export competitiveness and undervalued exchange rate, Goldman Sachs is further bullish on the RMB, lowering its 3/6/12-month USD/CNY forecasts to 6.80/6.70/6.50, and maintains a regional overweight rating on Chinese equities, with a preference for A-shares. AI Investment Beneficiaries: The AI investment boom shows no signs of slowing. Taiwan and South Korea, leveraging their dominance in supplying high-end logic chips and advanced memory chips, have become key economic and market beneficiaries. Technology product exports will drive current account surpluses in both countries to record highs and support strong earnings growth. Consequently, Goldman Sachs has raised its 12-month target for the South Korea KOSPI index to 9,000 points and the Taiwan Weighted Index to 45,000 points. Beyond hardware, 'intangible' investments in data infrastructure, software, and organizational capital are also increasing significantly, which will benefit data management and infrastructure companies and may create a new layer of 'superstar' companies through the productivity J-curve effect.

Analysis framework

Goldman Sachs employs a top-down macro analysis framework, starting with inflation data (CPI/PPI) and supply-side shocks (oil prices, tariffs) to deduce monetary policy paths (timing of Fed rate cuts) and interest rate trends. Secondly, it combines geopolitical events (summit meetings) to analyze their fundamental impact on trade flows and exchange rates, thereby judging medium-term trends in asset prices (RMB, Chinese equities). Finally, through supply chain analysis, it identifies direct beneficiary countries (Taiwan, South Korea) and sub-sectors (hardware vs. intangibles) in the AI capital expenditure cycle, translating macro trends into specific market index target adjustments.

Methodology notes

• Macroeconomic framework

  Decomposition of Inflation Drivers

  Attributes rising inflation to specific supply-side shocks (e.g., oil prices, tariffs) and structural factors (AI-related price pressures) to judge inflation persistence and constraints on monetary policy.

• Industry/Sector Analysis FrameworkUpstream-Midstream-Downstream Supply Chain Transmission

  AI Investment Benefit Transmission

  Analyzes how AI capital expenditure transmits along the supply chain, from upstream hardware manufacturing (Taiwan/South Korea chips) to downstream infrastructure and intangibles (software, data management), identifying the degree of benefit at different stages.

• Event Gaming and Behavioral Finance

  Tactical Catalysis of Geopolitical Events

  Distinguishes between the long-term structural impact and short-term tactical impact of geopolitical events, arguing that even without major breakthroughs, high-level meetings themselves can serve as short-term catalysts for asset prices (e.g., exchange rates, stock markets).

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Chinese Equities (A-shares/H-shares)

  Benefits from tactical de-escalation of China-US trade tensions and expectations of RMB strength

  Strengths

  Strong export competitiveness, undervalued exchange rate, attractive risk-reward profile

  Weaknesses

  Lower preference for H-shares relative to A-shares

  Comparison

  Overweight China in regional allocation

  Risks

  Unresolved China-US strategic divergences, low probability of a comprehensive agreement

• South Korea Equities (KOSPI)

  Benefits from dominance in advanced memory chips amidst the AI investment boom

  Strengths

  Strong tech exports, record-high current account surplus, robust earnings growth

  Comparison

  12-month target price revised up to 9,000 points

  Risks

  Slowdown in global AI investment growth

• Taiwan Equities (TWSE)

  Benefits from dominance in high-end logic chip production amidst the AI investment boom

  Strengths

  Strong tech exports, record-high current account surplus, robust earnings growth

  Comparison

  12-month target price revised up to 45,000 points

  Risks

  Slowdown in global AI investment growth

Key data

• US Core PCE Inflation ExpectationApproaching 3%Full-year expectation, higher than the 2% target
• Fed Rate Cut ForecastDecember 2026, March 2027Delayed compared to previous forecast (September 2026, December 2026)
• Year-End 2026 US Treasury Yield Forecast2-year 3.40%, 5-year 3.65%Raised compared to previous forecast
• China 2026 PPI Inflation Forecast2.0%Raised from previous forecast of 1.2%
• USD/CNY Forecast3-month 6.80, 6-month 6.70, 12-month 6.50Lowered compared to previous forecast, reflecting expectations of RMB strength
• South Korea KOSPI Target Price9,000 points12-month target, revised up from previous 8,000 points
• Taiwan TWSE Target Price45,000 points12-month target, revised up from previous 42,000 points
• US Cyberattack Cost EstimateApprox. $300 billionAbout 1% of last year's GDP, expected to increase significantly in the future

Impact & implications

For investors, sticky inflation and delayed rate cuts imply bond yields may stay higher for longer, necessitating vigilance against interest rate risk. Geopolitically, although structural contradictions in China-US relations are difficult to resolve, short-term expectations of trade de-escalation provide a configuration window for the RMB and Chinese equities, especially A-shares. The AI investment wave is not just a theme for the tech sector; it generates broad macroeconomic impacts by boosting productivity and changing corporate competitive landscapes (intangible asset investment). Taiwan and South Korea stock markets and global data infrastructure companies deserve close attention. Additionally, investors should remain alert to downside risks for the British Pound due to UK political uncertainty and legal tug-of-wars over US tariff policies.

Risks

• Escalation of the Iran conflict leading to further soaring energy prices
• Uncertainty in the outcome of US tariff policy legal reviews, potentially triggering new trade friction
• Intensifying UK political uncertainty leading to changes in fiscal rules and rising yields
• Enhanced AI model capabilities leading to significant increases in the frequency and cost of cyberattacks

What to watch

• Specific outcomes regarding trade and export controls from the Trump-Xi meeting
• Whether US core PCE inflation data continues to approach 3%
• Latest guidance on the rate cut path from the Fed FOMC meeting
• Possibility of leadership changes in the UK Labour Party and their impact on fiscal policy