China and COVID-19

On May 26, 2020, the Peoples Bank of China (PBOC) set the daily mid-point fix rate of the yuan at 7.13 yuan/dollar.  This was the lowest rate of the fix since February 2008. China’s CB lets the yuan fluctuate, within a tight band around this fix, on the onshore Chinese market.[1] In the offshore (Hong Kong) market the yuan is much less regulated.[2] The weaker fixing of the yuan, on the onshore market, had to do with China’s reluctance to defend its currency that was under pressure in the global markets.  China’s weakening currency reflected the lackluster performance of the Chinese economy due to COVID-19 and the relentless trade war with the United States that had doomed China’s economic outlook since 2019. China did not intervene in the FX market to defend its currency.  It knew that a depreciating currency could boost its exports and could lift its export-dependent economy.[3] 

Regulators and banks worked together to ensure that companies and households would not have to suffer unnecessarily due to their inability to make loan payments.  On January 26, 2020, China’s Banking and Insurance Regulatory Commission urged banks to be flexible and to support businesses hit hard by the pandemic including retail, hotels, restaurants and tourism.  Banks were instructed not to withdraw loans, to reduce the interest rates on loans, and to be more generous with the provision of unsecured credit.[4]   The majority of loans granted by Chinese banks go to state firms.  Lending to state-owned companies comes with an implicit state guarantee, making such lending less risky.[5]   The PBOC further reduced the amount of cash banks had to keep in their reserves in order to lend, unleashing the creation of more credit.[6]  

The government announced that this was the time to spur the ‘technologically-driven’ structural upgrade of the economy[7] by investing $1.4 trillion between 2020 and 2025 in 5G, data centers and other technologies.[8] In terms of fiscal stimulus, China’s response was much more tepid than that of the rest of G-20 states. China’s fiscal support, as of April 2020, through loans and tax relief, amounted 2.5% of its GDP. In comparison, the US fiscal support amounted to 18% of its GDP[9]  and Japan’s fiscal stimulus was 21% of its GDP.[10]  

Due to the economic lock-down (January 23-April 18), China’s economy plunged by 6.8% in the first quarter of 2020.[11] China’s bond market, however, proved resilient because it was considered a safe haven during the pandemic. Sixty billion yuans ($8.5 billion) flowed into the Chinese bond market, while the markets of other developing states froze. This is because investors viewed the Chinese market as somewhat unique: a safe but also lucrative market.

Money rushed into China’s market because it was seen as a safe market much like the markets of developed states.   At the same time, Chinese yields were much more attractive when compared to developed states’ yields. For instance, while the US 5-year Treasury yielded 0.35%, its Chinese equivalent yielded 2.24%.[12]

The Chinese economy came back roaring in the second quarter of 2020. It grew by 3% while the US economy was registering a 10% drop in growth. The lack of a consistent, nation-wide effort to stop the spread of the pandemic was stemming economic recovery in the United States.

[1] Elli Louka, The Global Economic Order: The International Law and Politics of the Financial and Monetary System 120-22 (2020).

[2] Id.

[3] Joanne Chiu, As its Economy Slows, China Embraces a Weaker Currency, WSJ, May 26, 2020,

[4] Chong Koh Ping, A $100 Billion Breather: China Banks Give Borrowers a Coronavirus Debt Holiday, WSJ, Apr. 19, 2020,

[5]Why has China’s Stimulus Been so Stingy?: Fighting with Shadows, Economist, Apr. 16, 2020,

[6]  Nathaniel Taplin, The Case of the Missing Chinese Stimulus,  WSJ,  Apr. 6, 2020,

[7] Jacky Wong, China’s New Infrastructure Push Isn’t All New, WSJ, Apr. 23, 2020,

[8] Liza Lin, China’s Trillion-Dollar Campaign Fuels a Tech Race With the U.S., WSJ, June 11, 2020,

[9] Phill Swagel, Congressional Budget Office’s Current Projections of Output, Employment, and Interest Rates and a Preliminary Look at Federal Deficits for 2020 and 2021, Apr. 24, 2020,

[10] Value of COVID-19 fiscal stimulus packages in G20 countries as of April 2020, as a share of GDP,

[11] Jonathan Cheng, China Records First Ever Contraction in Quarterly GDP on Coronavirus, WSJ, Apr. 17, 2020,

[12] The Dollar’s Dominance Masks China’s Rise in Finance:  Bucking the Trend, Economist, Apr. 16, 2020,