China: How Safe a Haven?

With the US dollar now strengthening amidst rising concern about tightening credit markets, it is worth assessing the multiple forces pressuring China’s balance of payments position from the coronavirus outbreak and its economic consequences. Some short-term factors such as a decline in outbound tourism appear to have boosted US dollar sales in February, but will probably reverse starting in April. China will also benefit from a larger trade surplus and a terms of trade improvement from falling commodity prices—for crude oil in particular.

Critical to the medium-term implications of the coronavirus crisis for China’s currency and balance of payments, particularly amidst tighter global US dollar funding conditions, is how “safe” China appears for portfolio inflows, despite limited currency hedging instruments and the continued presence of significant capital controls.

Posted March 13, 2020
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