China | 2021 outlook of external balance: will China’s BoP normalization come soon?

It is important to understand what was going on in the past year’s BoP abnormalities and to predict this year’s BoP items while investigating the sustainability of these abnormalities.

Key points

• Key points:
• Due to the "first-in-first-out" of the Covid-19 pandemic in China, a number of extraordinary phenomenon take place in the country’s Balance of Payments and external sector in 2020.
• When and how all of these BoP abnormalities could be normalized hinge on the course of global economic recovery and the tapering steps of monetary policy normalization by advanced economies' central banks.
• We analyze and predict every item of BoP in 2021, considering the post-pandemic economic situation in China and the world.
• Based on our prediction of the BOP components in 2021, we are able to do a quantitative exercise of forecasting the change of foreign reserves in 2021.
• Although the results indicate a healthy external balance, the authorities should still be aware of the fragility of this equilibrium based on the weak global environment particularly the potential “taper tantrum” and domestic economic woes.

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