The PBOC Faces a Shrinking World

It came as no surprise that China’s trade activity suffered in 1Q 2020 as the global economy struggled with lockdowns tied to the COVID-19 outbreak. Less expected, however, was the sharp drop-off in capital flows seen in 1Q balance of payments data – a trend that could have major implications for China’s exchange rate policy if it continues. Foreign direct investment inflows and outflows fell, portfolio inflows reversed, and China’s outbound lending appears to have stopped. In a world of shrinking capital flows, Beijing will need to pare back external investment and lending or allow the value of its currency to fall. Either path risks damaging China’s global economic influence and reputation.

Posted May 15, 2020
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