Renminbi remains resilient amid dollar strength; low-rate environment persists, but the curve may steepen

Overview

This report is Goldman Sachs' monitoring of China's FX and rates markets, covering valuation and policy stance, technicals, flows, fundamentals, liquidity, leverage, and bond supply and demand. The core conclusion is that growth concerns are rising but expectations for broad-based easing remain low; the renminbi remains resilient in a strong-dollar environment, while rates stay low but the long end is constrained by fiscal supply.

Core views

First, weakening domestic demand raises the risk that second-quarter real GDP growth will fall below 4.5% year-on-year, but the policy reaction function remains relatively passive; in the short term, the response is more likely to take the form of faster fiscal execution, ample interbank liquidity, and targeted credit easing. Second, CNY depreciation has been limited despite dollar strength, reflecting the continued presence of the renminbi stability policy anchor, and USD/CNY is likely to trade within a range in the short term. Third, low rates continue to receive fundamental and liquidity support, but increased auctions of ultra-long CGBs in the third quarter may limit the decline in long-end yields.

Analysis framework

The report adopts a monthly monitoring framework, decomposing FX into policy anchor, interest-rate differential, carry, momentum, basis, trade, and foreign-reserve factors; rates are decomposed into growth/inflation expectations, US rates, OMO and repo spreads, bank demand, government bond supply, and changes in leverage.

Methodology notes

• FX MonitoringCNY Policy Anchor and CFETS Basket Monitoring

  Renminbi resilience is measured through USD/CNY, DXY, the CFETS renminbi index, and deviations from the central parity rate.

  The report notes that the DXY rose approximately 2% in June, but renminbi depreciation against the dollar was limited, while the CFETS renminbi index rose approximately 2%, indicating that the policy preference for stability continues to constrain the renminbi.

• FX TechnicalsCarry, Momentum and CNH/CNY basis

  Forward carry, three-month momentum, the CNH/CNY basis, and Tom/Next points are used to assess the technical conditions for buying or selling the renminbi.

  The report shows that momentum for buying dollars and selling CNH increased in June, while momentum for buying CNH and selling EUR continued, reflecting divergent renminbi performance against different currencies.

• Rates ValuationCGB Yield OLS Fair Value Model

  CGB yields are explained using one-year growth and inflation expectations, one-year and ten-year UST yields, and the spread between the OMO target and the seven-day repo fixing.

  The model shows that one-year and ten-year CGB yields have been below model-implied fair value since March 2026, suggesting that low rates are supported by liquidity and allocation demand, although valuations are not clearly cheap.

• Bond Supply and DemandGovernment Bond Issuance and Bank Allocation Tracking

  The framework tracks central and local government bond issuance progress, NCD balances, policy bank bonds, LGFV bonds, and the monthly purchase structure of investors.

  As of June, government bond quota utilization was approximately 41.5%, slower than last year; meanwhile, banks bought government bonds and NCDs in May, with soft credit demand directing more bank funds toward bonds.

Asset mapping & comparison

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

• CNY/CNH

  Core macro asset

  Strengths

  The policy anchor remains in place, exporters may increase settlement at higher USD/CNY levels, and the CFETS basket is performing strongly.

  Weaknesses

  Widening China-US front-end rate differentials create depreciation pressure, while positive carry from long USD/CNY positions may suppress short-term renminbi appreciation.

  Comparison

  The report believes that the renminbi is likely to outperform other currencies amid dollar strength, particularly as EUR/CNY is supported by China's rising trade surplus with Europe.

  Risks

  If the dollar continues to strengthen, US front-end rates rise, or domestic growth concerns intensify, the renminbi may still come under pressure.

• CGB

  Rates and duration asset

  Strengths

  Weak domestic demand, low oil prices, soft credit demand, and bank bond allocation support low yields.

  Weaknesses

  Yields at some maturities are already below model fair value, while the long end also faces pressure from faster fiscal issuance.

  Comparison

  Ten-year CGB yields are expected to fluctuate within a low range, while the 30-year sector is more likely to steepen the 10s30s slope because of ultra-long supply.

  Risks

  Faster-than-expected fiscal policy execution, increased ultra-long bond supply, or a recovery in inflation expectations could push long-end yields higher.

• CNY IRS

  Interest-rate derivative

  Strengths

  Ample short-end liquidity and rising receiving-rate momentum support lower IRS rates.

  Weaknesses

  The rise in repo rates in June showed that liquidity conditions may still experience periodic volatility.

  Comparison

  The cash bond curve steepened in June while the IRS curve flattened, indicating divergence between cash bond supply and swap pricing.

  Risks

  PBOC operating rates, repo rates, and quarter-end liquidity disturbances may alter the shape of the swap curve.

Key data

• May Retail Sales-0.6% yoyReflecting weaker domestic demand, partly due to the phase-down of trade-in subsidies and a high base effect.
• Monthly Fixed-Asset Investment in May-10.6% yoyMainly dragged down by slow fiscal execution and continued weakness in property investment.
• Estimated Domestic Demand Growth in April-May1-2% yoyGoldman Sachs' growth decomposition shows only modest domestic demand growth.
• Real Export Growth in the Latest Two Monthsapproximately 4.5% yoyBelow the first-quarter growth rate of 15.2%.
• June CFETS Renminbi Indexapproximately +2%Rose despite a stronger dollar index, indicating strong performance of the renminbi basket.
• USD/CNY Rangeapproximately 6.75 to 6.79Declined initially in June before returning to around 6.79 after the FOMC, resulting in limited net movement overall.
• Official Foreign Exchange ReservesUSD 3442bnAs of May 2026.
• Commercial Banks' Net External AssetsUSD 1505bnAs of May 2026.
• June Central Government Bond Net Issuanceapproximately RMB318bnBelow the pace in 2025; approximately 40% of the annual CGB issuance quota had been used as of June.
• June Local Government Special Bond Issuanceapproximately RMB372bnFaster than in April and May; approximately 43% of the special bond quota had been used as of June.
• Government Bond Quota Utilization41.5%As of June, notably slower than last year.
• Change in June NCD Balance+RMB747bnReflecting changes in bank liabilities and the supply of liquidity instruments.

Impact & implications

The implication for asset allocation is that the renminbi may outperform other currencies during periods of dollar strength, particularly the euro, where fundamentals provide support; the front end of China's rates curve remains depressed by ample liquidity and weak credit, while downside at the long end is constrained by fiscal supply and ultra-long government bond issuance. Investors should simultaneously monitor the strength of policy support for exchange-rate stability, exporter settlement flows, the pace of fiscal execution, and PBOC liquidity tools.

Risks

• The risk that second-quarter real GDP growth falls below 4.5% year-on-year is rising.
• If US front-end rates continue to rise, widening China-US rate differentials may create new depreciation pressure on the renminbi.
• The policy response is relatively passive; if fiscal execution and targeted easing are insufficient, growth concerns may persist.
• Increased ultra-long CGB supply may limit the decline in long-end yields and keep the curve relatively steep.
• The daily impact of FX stabilization tools may be short-lived, serving more to slow the pace of exchange-rate movement than to reverse fundamental trends.

What to watch

• Policy signals from the July Politburo meeting.
• The pace of reductions in the USD/CNY central parity rate and upward pressure on the spot exchange rate.
• Exporter settlement behavior at higher USD/CNY levels.
• Potential China-US leaders' visits in late September and changes in expectations for Fed rate hikes.
• Changes in PBOC overnight reverse repos, OMO, and interbank repo rates.
• The scale of ultra-long CGB auctions in the third quarter and the response of long-end yields.
• Government bond quota utilization, local special bond issuance, and the pace of fiscal implementation.