Published: Dec 16, 2025
In a recent report that has captured the attention of global markets, Goldman Sachs declared the Chinese yuan to be approximately 25% undervalued, forecasting a period of sustained appreciation against the US dollar through 2026 [1].
This assessment, labeled a “highest conviction” call by the investment bank, has ignited a debate that extends far beyond the realm of foreign exchange markets. The core of the discussion revolves around a provocative question: does Goldman’s analysis signal that China is poised to win the economic competition against the United States and much of the Western world over the next three years?
This article delves into the details of the Goldman Sachs report, analyzes the economic and geopolitical factors underpinning its conclusions, and explores the implications of a strengthening yuan for the global balance of power. By examining the structural advantages driving China’s export-led growth and the relative challenges facing Western economies, we can better understand the potential for a significant shift in the international economic order.
The Core of Goldman's Analysis: A Deeply Undervalued Yuan
Goldman Sachs’ conclusion that the yuan is significantly undervalued is not based on a single metric but on a comprehensive analysis using its proprietary valuation models, the Dynamic Equilibrium Exchange Rate (GSDEER) and the Goldman Sachs Fair Value Exchange Rate (GSFEER). The GSDEER model, which accounts for factors like productivity and inflation differentials, suggests a fair value for the yuan near 5.00 to the US dollar, implying a staggering 30% undervaluation from its current level of around 7.00 [2].
The GSFEER model, which focuses on trade balances, indicates a 12% undervaluation on a trade-weighted basis.
Goldman Sachs Yuan Valuation (Dec 2025) | |
Valuation Metric | Undervaluation |
Weighted Average (GSDEER + GSFEER) | ~25% |
GSDEER Fair Value vs. USD | ~30% (Fair Value at 5.00) |
GSFEER (Trade-Weighted) | ~12% |
Source: Investing.com 2
Based on this analysis, Goldman projects a gradual but steady appreciation of the yuan, forecasting it to reach 6.85 to the dollar within 12 months. While this represents a modest appreciation, the underlying message is clear: the fundamental economic drivers are pointing towards a stronger Chinese currency.
The Engine of China's Growth: An Unstoppable Export Machine
The primary driver behind Goldman’s bullish yuan forecast is China’s formidable export performance. Despite escalating trade tensions and US tariffs, China’s real export growth is on track for an 8% expansion in 2025, with Goldman Sachs Research raising its annual forecast for the coming years to 5-6%, up from a previous 2-3% [3].
This resilience is a testament to the increasing competitiveness of Chinese products, not just in traditional labor-intensive sectors but also in high-tech industries.
This phenomenon, which some are calling “China Shock 2.0,” is characterized by China’s growing dominance in high-value-added manufacturing, such as electric vehicles, semiconductors, and renewable energy technology. This shift is significant because it directly challenges the economic strengths of developed nations in Europe, Japan, and the United States. As Goldman’s report notes, for every one percentage point of export-driven boost to Chinese GDP, other economies may experience a drag of 0.1 to 0.3 percentage points [3]
China’s 15th Five-Year Plan (2026-2030) further solidifies this strategy, with a clear focus on upgrading traditional industries and fostering growth in emerging sectors. This state-led industrial policy, combined with a massive and growing trade surplus that exceeded $1 trillion in the first 11 months of 2025, creates a powerful engine for economic growth and a natural upward pressure on the yuan [4].
Geopolitical Chess: A Shifting Balance of Power
The implications of a stronger, yet still undervalued, yuan extend deep into the geopolitical arena. The recent trade truce between the US and China, following a meeting between their respective leaders in October 2025, highlighted China’s growing leverage. Beijing’s control over critical rare earth minerals proved to be an effective bargaining chip, leading to a reduction in US tariffs and a loosening of export controls [3].
This episode underscores a broader shift in the US-China relationship, where China is increasingly positioned as an equal, capable of pushing back against Western pressure. A stronger yuan, backed by a robust and expanding economy, would further enhance China’s geopolitical standing. It would also provide a disinflationary impulse to the global economy, as cheaper Chinese goods, now including high-tech products, continue to gain market share.
The Western Response: A Difficult Dilemma
For the United States and its allies, a strengthening yuan presents a complex dilemma. On one hand, a stronger Chinese currency could help to rebalance global trade and reduce the massive trade deficits that Western nations have with China. On the other hand, it is a clear indicator of China’s growing economic might and its successful challenge to the West’s technological dominance.
The traditional response to a rising economic competitor – trade barriers and tariffs – has proven to be of limited effectiveness, as demonstrated by China’s resilient export growth. Moreover, China’s strategic control over key resources like rare earth minerals gives it significant leverage in any trade dispute. This leaves Western policymakers with a limited set of options, each with its own set of challenges.
Conclusion: A Signal, Not a Certainty
Does Goldman Sachs’ analysis definitively mean that China will “win” the economic competition against the US and the West over the next three years? Not necessarily. Economic forecasting is fraught with uncertainty, and there are significant risks to China’s growth trajectory, including a protracted property slump and the potential for weaker-than-expected domestic demand [2].
However, the Goldman Sachs report is a powerful signal that should not be ignored. It highlights the structural advantages that are currently propelling the Chinese economy forward, from its manufacturing prowess to its strategic industrial policy. The undervaluation of the yuan, combined with its projected appreciation, reflects a fundamental shift in the global economic landscape. While not a guarantee of victory, it is a clear indication that the economic competition between China and the West is entering a new phase, one in which China is increasingly setting the terms of engagement.
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