International Policy Digest

Sponsored Content /29 Apr 2020

The Chinese Economy Could Benefit as Europe and the U.S. are Still Dealing with Coronavirus

When initial reports came in detailing the containment and mitigation efforts the Chinese government had taken to halt the spread of the novel coronavirus, analysts immediately knew that the Chinese economy had been dealt a rare blow. Yet after lockdown measures were extended to several European countries and the U.S. in order to battle the virus, could China’s position in the global economy be offset thanks to its early recovery?

The economic ripple effect of the coronavirus

Even though it seemed devastating at the time, the fact that China was affected early allowed for the opportunity to recover and return to a strong position just as other global players began to crumble. In many respects, the financial crisis was one of the worst ever felt by Western economies, as proved by increased market volatility. As the fluctuation of the S&P 500 demonstrates, indicative of a bearish market, the disruption caused by the coronavirus outbreak saw a decline worse and more rapid than the market crash following Black Monday in 1987 or the dot-com crash in 1999 – and even the Great Recession the markets experienced in 2007.

Against this setting, the Chinese yuan might emerge as a strong contender in the forex exchange market, especially compared with traditionally stable currencies like the U.S. dollar or the euro. Forex trading is a significant sector of global trading that focused on currency conversion between a base currency and a quote currency, producing a staggering $5 trillion daily trading volume on average. As China is expected to step in to fill any potential void left behind by its global trading partners, including the U.S., as their national economies are reeling from the virus outbreak, some traders might view the Chinese yuan as a wise investment.

Could China recover quickly enough to dominate?

Without a doubt, China was also hit hard: in January and February 2020, industrial output decreased by 13.5% compared to figures in the previous year, while retail fell by 20.5%, fixed asset investment shrunk by a whopping 24.5%, and private sector investment was affected even more, falling 26.4%. For an economy constantly on an upwards trajectory, this sounded like a nightmare. But it was not long before investors shifted their focus elsewhere: due to prolonged lockdown measures, countries across Europe and North America continue to review their projected GDP growth to account for the impact of the coronavirus on their economies.

This has translated to limited competition for China, which has managed to contain the virus and re-open its economy. As demand surges and supply falls in critical sectors, China might emerge as the leading supplier for global manufacturing needs – a trend that is already prominent for medical equipment like PPE and testing kits, which are extremely sought-after in the West. Thus, while China is likely to suffer an unprecedented GDP fall of 16% in Q1 2020, it will still perform better compared to its peers.

This unlikely advantage could push the yuan to a much stronger position, against national currencies across Europe and the U.S. which might experience inflation due to government plans to bail out or stimulate their struggling economies.

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