COVID-19 and Unusual Chinese Capital Flows in 1Q 2020

The COVID-19 outbreak and the resulting financial panic in March caused some surprising reversals in China’s 1Q 2020 balance of payments—a current account deficit, a large portfolio securities deficit, and a surge in unexplained capital inflows under errors and omissions. Both SAFE and Chinese banks likely sold foreign assets—probably both Treasuries and JGBs—and then repatriated the proceeds to manage the effects of a global US dollar funding squeeze in March. Capital outflows continue, though, hidden in the tourism account even as China has seen little actual tourism over the past five months.

The PBOC seemingly broke from its management of the currency against a trade-weighted basket both in March and in early June, raising the prospect of more policy-driven adjustments to China’s exchange rate this year.

Posted July 13, 2020
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