The impact of COVID-19 outbreak on China’s External Balance

Our results based on the foreign reserve decomposition method and the forecasting practice show that the impact of COVID-19 on China, although very large on Q1 and Q2 economic growth, will be quite limited on China’s Balance of Payments, especially the foreign reserve.

Key points

• Key points:
• The outbreak of COVID-19 takes its toll on China’s economy, which will lead to a deep-V shape growth slowdown in Q1 and Q2.
• However, its impact on China's external sector will be quite limited.
• We examine how the COVID-19 outbreak affects different components of the BOP. Our qualitative analysis show that the epidemic tends to expand the surplus under the current account while deepen the deficit under the financial and capital account.
• Our foreign reserve decomposition forecasting shows that the COVID-19 will on the other hand increase Chinese foreign reserve marginally in 2020.
• Although the impact on Chinese external sector is quite limited, the authorities still need to be aware to avoid capital flight and manage the market sentiments.

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