Goldman Sachs expects stronger yuan to boost Chinese stocks

CHINESE stocks are expected to benefit from further gains in the yuan, which has been showing resilience amid the country’s trade spat with the US, according to strategists at Goldman Sachs.

Every 1 per cent appreciation of the yuan versus the US dollar can boost Chinese equities by 3 per cent thanks to factors including improved corporate earnings outlook and stronger foreign inflows, strategists including Kinger Lau wrote in a note on Monday (May 26). Earlier this month, the bank raised its 12-month forecast for the yuan to 7 per US dollar, from 7.35.

“Chinese stocks tend to perform well when the currency rises,” Lau and his colleagues wrote. The outlook for the currency lends support to their “overweight stance” on Chinese stocks, they said, adding that consumer discretionary, property and broker stocks typically outperform under a strong currency.

The MSCI China Index has recouped its losses since US President Donald Trump’s Apr 2 tariff offensive, with a three-month trade truce with the US helping the market’s rebound. Chinese assets overall have benefited from a diversification away from US markets as concerns about Trump’s tariffs and tax cuts sustain the “sell America” narrative.

While investors continue to doubt the allure of US stocks and the US dollar, the People’s Bank of China (PBOC) has sought to keep the yuan stable and add support to the economy via interest-rate cuts.

The onshore yuan has gained around 1.4 per cent versus the greenback in May, and reached 7.1674 on Monday, its strongest level since November.

On Monday, the PBOC strengthened the yuan’s reference rate by the most since January amid the greenback’s extended slide. That said, the official fixing of 7.1833 per US dollar was still weaker than the yuan’s spot price, which suggests China is managing volatility and seeking to avoid a sharp appreciation such as that seen in the Taiwanese dollar. BLOOMBERG