RMB remains resilient despite dollar strength; low rates persist, but the yield curve may stay steep

Overview

This report is Goldman Sachs' China FX and rates monitor, tracking the latest developments in the RMB exchange rate and Chinese rates markets across valuation and policy stance, technicals, flows, fundamentals, rate levels and the term structure, liquidity and leverage, and bond supply and demand. The core conclusion is that growth concerns are intensifying but expectations for broad-based easing remain low; the RMB remains resilient against a backdrop of dollar strength, while Chinese rates will continue to operate at low levels, with long-end yield declines constrained by fiscal bond supply.

Core views

First, weakening domestic demand has increased market concerns about slower growth, but the policy reaction function remains relatively passive. In the near term, authorities are more likely to respond by accelerating fiscal implementation, maintaining ample interbank liquidity, and providing targeted credit support rather than rapidly introducing broad-based easing. Second, although the RMB is pressured by a wider US-China rate differential and dollar strength, the policy anchor remains in place; RMB depreciation against the dollar is limited, while the CFETS RMB Index has risen. Third, USD/CNY is expected to trade range-bound over the summer, with positive carry from being long USD/CNY offset by exporters converting FX at higher exchange-rate levels. Fourth, Chinese front-end rates should remain low amid weak fundamentals and liquidity support, while 10-year government bond yields remain range-bound at low levels and 30-year and ultra-long-term supply keeps the curve steep.

Analysis framework

The report adopts a macro data-tracking and market-indicator monitoring framework. It divides the FX analysis into the policy anchor, pricing deviations, flows, technical indicators, and fundamentals; and divides the rates analysis into yield levels, the term structure, inflation and growth expectations, interbank liquidity, leverage behavior, and bond supply and demand. The focus is not on providing a single asset-price target, but on identifying the short-term drivers, policy constraints, and key observation windows for the RMB and Chinese rates.

Methodology notes

• FX policy and valuationEstimation of the RMB central parity countercyclical factor

  Measures the strength of policy efforts to stabilize the exchange rate by comparing the official RMB central parity with an estimate based on the official central-parity mechanism.

  The report notes that the countercyclical factor narrowed to approximately +200 points in June, indicating that the policy anchor continues to affect RMB resilience, although its intensity has changed from earlier levels.

• FX technicalsCarry-to-volatility ratio and momentum

  Uses the annualized three-month forward carry return, three-month rolling realized volatility, and three-month cumulative FX total return to assess trading attractiveness.

  The report shows that the USD/CNH carry-to-volatility ratio rose significantly in June, momentum from buying USD and selling CNH strengthened, and momentum from buying CNH and selling EUR continued.

• Rates valuationOLS fair-value model for Chinese government bond yields

  Explains Chinese government bond yields using variables including one-year forward growth and inflation forecasts, one-year and 10-year US Treasury yields, and the spread between the OMO target rate and the seven-day repo fixing.

  The report states that one-year and 10-year Chinese government bond yields have been below model-implied fair value since March 2026, with adjustments made from August 2025 for the cancellation of the interest-income VAT exemption.

• Bond supply and demandTracking government bond quota utilization and investor flows

  Tracks central government bonds, local government general bonds, local government special bonds, policy bank bonds, NCDs, and bond purchases by different investor types.

  The report uses issuance-quota utilization, net financing, and the monthly composition of investor purchases to assess the impact of fiscal supply and bank allocation behavior on the interest-rate curve.

Asset mapping & comparison

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

• USD/CNY

  Core exchange-rate pair under monitoring

  Strengths

  The policy anchor, exporters' FX conversions at elevated levels, and potential expectations of a meeting between the Chinese and US presidents could help limit upside.

  Weaknesses

  Dollar strength and rising US front-end rates widen the US-China rate differential, increasing RMB depreciation pressure.

  Comparison

  Compared with the approximately 2% June gain in the DXY, RMB depreciation against the dollar was limited, demonstrating relatively strong resilience.

  Risks

  If the dollar continues to strengthen, expectations of Fed rate hikes revive, or Chinese growth falls materially below expectations, USD/CNY could break out of its range.

• CFETS RMB Index

  Measures RMB performance against a basket of currencies

  Strengths

  It rose approximately 2% in June, reflecting RMB strength relative to other currencies.

  Weaknesses

  Basket appreciation could increase pressure on exports and policy balancing.

  Comparison

  The RMB was broadly stable against the dollar but appreciated more noticeably against the currency basket.

  Risks

  If policymakers become more focused on external-demand pressure, room for further appreciation of the RMB basket could be limited.

• EUR/CNY and long CNH versus EUR trades

  Cross-currency relative-value trade

  Strengths

  A rising trade surplus between China and Europe provides fundamental support for RMB appreciation against the euro.

  Weaknesses

  Trade crowding and European policy communication could affect short-term volatility.

  Comparison

  The report states that momentum from shorting the euro and buying CNH has increased, with stronger fundamental support than simply being long RMB against the dollar.

  Risks

  If the euro rebounds or China's trade relationship with Europe deteriorates, the trade could retrace.

• Chinese front-end rates

  Primary beneficiary of the low-rates view

  Strengths

  Weak domestic demand, soft loan demand, low oil prices, and the PBOC's maintenance of ample interbank liquidity jointly depress front-end rates.

  Weaknesses

  Expectations for policy rate cuts are limited, while quarter-end liquidity disturbances may still cause short-term volatility.

  Comparison

  Front-end yields fell in June, and momentum for receiving CNY rates at the short end rose significantly.

  Risks

  If repo rates remain above the OMO target or funding conditions tighten, the assumption of low front-end rates could be challenged.

• 10-year Chinese government bonds

  Benchmark asset in the rates market

  Strengths

  Weak growth, low inflation, and bank bond allocations support yields remaining at low levels.

  Weaknesses

  The model shows that one-year and 10-year yields are below fair value, indicating limited valuation protection.

  Comparison

  10-year government bonds were broadly flat in June, and the report expects continued low-level range-bound trading.

  Risks

  Faster fiscal implementation, increased supply, or a recovery in growth expectations could push yields higher.

• 30-year Chinese government bonds and the 10s30s curve

  Long-end and ultra-long-end term-structure risk

  Strengths

  The low-rate environment continues to support demand for long-duration bonds.

  Weaknesses

  Additional ultra-long-term government bond auctions in 3Q could limit declines in long-end yields.

  Comparison

  The 10-year yield was flat in June while the 30-year yield rose slightly, steepening the curve.

  Risks

  If ultra-long-term supply is released in concentrated volumes or term premiums rise, the 10s30s slope could steepen further.

• NCDs and bank bond allocations

  Indicators of banking-system liquidity and allocation behavior

  Strengths

  Soft loan demand may encourage banks to continue increasing bond investments; outstanding NCDs increased by RMB 747bn in June.

  Weaknesses

  If funding rates rise, leverage and allocation demand could slow.

  Comparison

  Banks' purchases of government bonds and NCDs in May were an important marginal source of bond demand.

  Risks

  Regulatory or liquidity constraints could weaken banks' demand for bonds.

Key data

• May retail salesYoY -0.6%Weak retail sales partly reflected the fading boost from trade-in subsidies and a high base.
• Monthly fixed-asset investment in MayYoY -10.6%Mainly dragged down by slow fiscal policy implementation and continued weakness in property investment.
• Domestic demand growth from April to MayApproximately 1% to 2% YoYGoldman Sachs' growth decomposition points to a significant weakening in domestic demand.
• Actual export growth over the latest two monthsApproximately 4.5% YoYBelow the 15.2% year-over-year growth rate in 1Q 2026.
• June DXYUp approximately 2%RMB depreciation against the dollar was limited despite dollar strength.
• June USD/CNYReturned from around 6.75 to around 6.79The pair showed an overall back-and-forth pattern in June, with pressure increasing after the FOMC.
• June CFETS RMB IndexUp approximately 2%Reflecting RMB appreciation against a basket of currencies.
• China's official foreign-exchange reserves in May 2026USD 3442bnCommercial banks' net external assets were USD 1505bn at the same time.
• June net central government bond issuanceApproximately RMB 318bnBelow the 2025 pace; by June, the central government had used 40% of the full-year government bond issuance quota.
• June local government special bond issuanceApproximately RMB 372bnFaster than in April and May; by June, local government special-bond quota utilization was 43%.
• Government bond quota utilization by June41.5%Significantly slower than last year. The measure includes central and local general and special bonds approved by the National People's Congress and excludes local refinancing bonds.
• Increase in outstanding NCDs in JuneRMB 747bnAn important indicator of changes in bank allocation and money-market supply.
• Special refinancing bond issuance in 1H 2026Approximately RMB 1.6tnApproximately 82% of the 2026 quota.
• New special-purpose LGSB issuance in 1H 2026Approximately RMB 431bnApproximately 54% of the 2026 quota.

Impact & implications

For asset allocation, the report suggests that the key driver of RMB assets is not simply dollar strength or weakness, but the combination of the policy anchor, exporters' FX conversions, carry from interest-rate differentials, and growth expectations. The RMB may lack the conditions for rapid one-way appreciation in the near term, but could prove more resilient than other non-dollar currencies. The front end of Chinese bonds should continue to benefit from low rates and ample liquidity, while the long end faces pressure from term premiums as fiscal bonds and ultra-long-term government bond supply accelerate in 3Q. For macro monitoring, the July Politburo meeting is an important window for determining whether policy shifts from passive responses toward more proactive easing.

Risks

• If China's real GDP growth falls below 4.5% while the policy response remains slow, growth concerns could further depress risk appetite.
• Continued dollar strength or rising US front-end rates would widen the US-China rate differential and increase RMB depreciation pressure.
• Lower-than-expected exporter FX conversion activity could weaken the constraint on USD/CNY upside.
• Faster fiscal policy implementation and ultra-long-term government bond issuance in 3Q could push long-end yields higher or steepen the curve further.
• If interbank funding conditions shift from ample to tight, the assumption of low front-end rates would be challenged.
• If policy signals lack clearer support, market expectations for broad-based easing could remain suppressed.

What to watch

• Fiscal, monetary, and growth-stabilization policy signals from the July Politburo meeting.
• The pace of adjustments to the USD/CNY central parity, changes in the countercyclical factor, and the PBOC's use of FX policy tools.
• Changes in the dollar index, US front-end rates, and expectations for Fed rate hikes.
• Exporters' FX conversion behavior at higher USD/CNY levels.
• Progress on President Xi Jinping's potential visit to the United States in late September and its impact on RMB sentiment.
• The pace of ultra-long-term central government bond issuance and auction demand in 3Q.
• The position of overnight and seven-day interbank repo rates relative to policy rates.
• Changes in credit demand, bill-discount rates, PPI, and core CPI.
• Monthly flows into government bonds, NCDs, and credit bonds from banks, funds, foreign investors, insurers, and other investors.