COVID19 is a risk factor in financial market, which can substantially affect international finance. It can affect foreign exchange market, international trade, and balance of payment (BOP). Therefore,...

Effect of COVID19 on Chinese Balance of Payment (BOP)
Abstract
China is the second largest economy in the world and also the largest exporter with highest exchange reserve in the world. They also do have the fastest growing GDP in the world. But, its due to covid-19, there was a slowdown in the economy from 5.8% in 2019 to 2.3% in 2020. There will be structural alteration and economic progress which will help China’s current account which is a part of Balance of Payment enter a more balanced stage of development. But, due to cyclical alterations in the prices of international commodities as well as demand for imports and exports of products there will be huge fluctuations in current account which will not change the overall situation of a basic equilibrium.
Analysis
China has been accused of maintaining an undervalued currency in order to fuel their exports deliberately. As per the Big Mac Index which is widespread globally, the equilibrium RMB/US dollars exchange rate can be calculated by dividing the price of Big Mac in China by the price of Big Mac in terms of US dollars. In 2005, it was discovered that a Big Mac of China was sold for RMB10.50 in China compared to $3.06 in US. Hence, the purchasing power parity which was achieved based on the Big Mac Index was valued at RMB3.43:US$1. Due to this there was an undervaluation of the actual spot rate by 59% i.e.; RMB8.28:US$1 (James Laurenceson & Kam Ki Tang, 2006). Therefore, China’s exchange rate can be considered as the de facto peg against the dollar which has not changed since 1995. Hence, due to a depreciation in the dollar in the year 2003 & 2004 there was a depreciation in renminbi (RMB) against other currencies. This also resulted in external surplus for China and a situation of “unfair competitiveness”. Due to this issue the Republic of China brough flexibility in the exchange rate regime. If there is an exchange rate movement then there might be reduction in large current account deficit by the US if a revaluation happens. The low price of Chinese product would lower the domestic prices in the importing countries (Virginie Coudert & Cécile Couharde, 2005). The ultimate objective of China’s economic policy is to manage the Yuan exchange rate in order to benefit the exports. There is no floating exchange rate in China which is controlled by the market forces. Instead, it pegs Yuan or renminbi against US dollars (Elvis Picardo, 2019).
China’s currency policy is intended to lower the cost of exports and imports expensive. China has deliberately undervalued their currency against dollars. They also have become the largest contributor of annual US trade deficit with China. As a result of this there have been considerable decline in manufacturing jobs in United States. The impact of China’s currency policy with respect to US was very complex. The reason for undervaluing the renminbi is observed as an indirect export subsidy which reduces the prices of Chinese products which are being imported to United States. As a result of this the US firms and users of Chinese products are benefitted. On the other hand, the US import competing firms and its employees are negatively impacted. Due to this reason China’s involvement in the currency market will assist them to gather a large amount of foreign exchange reserves. Since, these large reserves are accumulated in terms of US dollars it helps to in turn to buy the US debts. The US government as a result of this are able to fund its budget deficit. This helps to keep the rate of interests on loans in US low. Hence, due to appreciation in the renminbi against US dollars few sectors in US gets benefitted while others are negatively impacted (Economist Intelligence Unit, 2013).
As per our research it can be observed that the global pandemic covid-19 have varied impacts on the various components of the Balance of Payment (BOP). The impact of covid-19 on the goods trade in China will have same impact to that of...