The Fight Against Inflows

China’s 3Q 2020 preliminary balance of payments data show that China’s current account surplus is running at a pace around $400-420 billion annualized, or 2.6-2.8% of this year’s estimated GDP. External surpluses of roughly this size are likely to continue until outbound travel from China resumes, perhaps in the summer of 2021.

The central bank has likely continued intervening to manage the currency’s rise in 3Q, but in the past three weeks, the PBOC seems to be backing away and permitting faster yuan appreciation (to the 6.57 per dollar level today), under pressure from stronger inflows. There are limits to Beijing’s tolerance for a stronger yuan, but the central bank is in for a long fight against persistent inflows. Expect more appreciation, along with administrative measures to artificially encourage USD demand among banks and state-owned corporates.

Posted November 17, 2020
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