Capital outflows likely to remain the key policy driver in China

It is worth bearing in mind that China's capital outflows will remain a key concern for the authorities, underscoring their desire to keep the currency stable. Capital outflows have averaged over USD 50 billion a month this year although this is well down from over USD 100 billion at the start of the year (recall that the official reserves decreased by USD 15.9 billion in August, to USD 3.185 trillion).

However, data yesterday reinforced the reality that capital outflows this year have been masked as imports, particularly from Hong Kong. The ministry of commerce reported yesterday that imports from Hong Kong rose by 129.0 percent y/y in January-July to USD 12.6 billion, mostly disguised capital outflows.

Premier Li recently reiterated that the authorities would keep the CNY exchange rate "basically stable at a reasonable and balanced level" and there is no basis for sustained devaluation of the currency. This has been especially true since the introduction of the 'managed float' regime in August 2015 (when the USD/CNY central reference rate was weakened by 1.9 percent followed by another 1.6 percent the next day).

This is also consistent with SAFE’s position that expectations of CNY depreciation have diminished, adding that pressure from cross-border capital flows eased in during the first half of 2016. Moreover, the still substantial monthly trade surpluses will continue to support the CNY.