Global Markets Daily China’s Balancing Act Needs a Stronger Yuan and Stronger Demand

Economics Research 5 August 2026 | 4:15PM BST

Global Markets Daily: China’s Balancing Act Needs a Stronger Yuan and Stronger Demand

n Data in the first half of 2026 continued to paint a picture of a bifurcated Chinese Kamakshya Trivedi | economy—with weak domestic demand and strong exports. This has led to a Goldman Sachs International renewed debate over whether policies to support demand or nominal currency Hui Shan appreciation are the right response. | Goldman Sachs (Asia) L.L.C.

n In our view, this is a false dichotomy. Viewed through the lens of the Swan model, the current situation has two facets that require two complementary policy responses. n As we have argued previously, China’s nominal exchange rate is significantly undervalued—around 20% at a minimum—on our GSDEER and GSFEER metrics. Together with its strong manufacturing competitiveness, this undervaluation— especially in the post-pandemic period—has helped produce a significant trade and current account surplus above a sustainable “norm.” A gradual exchange-rate appreciation should help facilitate a return to external balance and mitigate protectionist pressures from the rest of the world. n On the other hand, weak domestic demand, which deteriorated sequentially in Q2, raises the risk that growth falls below target or potential. A fiscal boost that supports near-term growth, alongside structural changes that gradually lift consumption’s share of GDP growth—consistent with the goal laid out in the 15th Five-Year Plan—should move the economy closer to internal balance. n That policy combination—expansionary domestic policy and currency appreciation—is unlikely to be enough to address all global imbalances, but it should help move China’s own economy toward a better balance and provide a more robust basis for achieving its medium-term growth targets.

China’s Balancing Act Needs a Stronger Yuan and Stronger Demand

A Swan’s eye view of China’s bifurcated economy Data in the first half of 2026 continued to paint a picture of a bifurcated Chinese economy, with strong performance on the external side and a sluggish domestic sector. That perception was reinforced squarely in the latest monthly dataset. China’s trade surplus expanded to a record $125bn in June—$1.5tn at an annual rate—even as property investment continued to decelerate and retail sales remained stagnant (Exhibit 1).

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Exhibit 1: The Chinese economy has been extremely bifurcated, with strong exports but weak domestic demand

Percent yoy Percent yoy 30 30 China June Activity Indicators 20 20

Property FAI Cement Electricity

Infra FAI Export value Mfg FAI Total FAI Property

Retail sales production Industrial production Services volume completions

production output Online Property goods sales Auto sales Catering sales new starts volume

Source: CEIC, Goldman Sachs Global Investment Research

In truth, that bifurcation has existed for several years, especially in the post-pandemic period (Exhibit 2). As a result, overall growth in China has become increasingly lopsided, reliant on net exports even as domestic activity has been lackluster. But there are also global consequences. The persistent trade surplus and associated current account surplus have sparked protectionist responses, have been a key feature of global imbalances for many years, and have recently reignited a debate over whether policies to support domestic demand or nominal currency appreciation are the appropriate response.

Exhibit 2: China’s retail sales have remained persistently below the pre-Covid trend, while China’s trade surplus has been above trend and rising Bn USD Bn USD Bn USD Bn USD

Monthly retail sales Monthly goods trade surplus (ex-gold) linear trend 2010-19 linear trend

Source: Haver Analytics, Goldman Sachs Global Investment Research

In our view, this is a false dichotomy. Drawing on the framework pioneered by Australian economist Trevor Swan, policymakers in open economies often face two simultaneous targets: achieving…