Goldman says dollar-to-yuan ‘avalanche’ is overstated

investmentnews.com:

Some investors are overestimating the stockpile of Chinese money that could be converted back into yuan, as firms may not yet be ready to abandon dollar holdings, according to Goldman Sachs Group Inc.

US assets remain attractive to Chinese firms, given the still-large interest rate differentials between the two countries and weak domestic sentiment, analysts including Xinquan Chen wrote in a note Friday. The team calculated that around $400 billion has been hoarded by exporters from mid-2022, a figure below some market estimates.

The yuan extended its recent advance Friday to levels unseen in more than a year, as traders mulled signs of corporate buying amid broad weakness in the greenback. The offshore yuan has surged around 2% in August to erase its losses for the year and is now up about 0.7% in 2024 against the faltering greenback. 

Investors have been trying to gauge just how big Chinese companies’ foreign stockpile may be and how much is likely to be repatriated, further fueling the yuan rally. Eurizon SLJ Capital’s Stephen Jen suggested a potential inflow of $1 trillion, half the hoard he estimated has been built up since the pandemic, in a recent interview with Bloomberg News. Barclays Plc’s Lemon Zhang put the figure at a maximum of $100 to $200 billion.

“Our gauge suggests much smaller dollar hoarding by exporters from mid-2022 to 2024,” the Goldman analysts wrote. “The recent yuan appreciation against the dollar is mostly driven by external factors, especially by the changes of market pricing for faster Fed rate cuts and US election, which would discourage yuan shorts.” 

For Goldman, China’s weak domestic fundamentals are likely to trump over the medium-term, with the yuan expected to underperform its major