Still more Chinese capital controls

From Macquarie:

 Higher pressure from capital outflows: China’s headline FX reserves could drop by US$65bn in Nov, after falling US$46bn in Oct, partly due to the strong USD which lowers the dollar value of non-dollar reserve assets. But it is also due to the strong pressure from capital outflows due to the prevailing depreciation expectations. In our 2016 outlook, considering the interest rate differential, we thought that the PBoC would allow only a very modest pace of depreciation (2-3%) and combine it with high volatility. However, it turns out that the PBoC let the RMB fall over 6% against US$ in almost a one-way run. Economic history shows that it is a sure recipe to convince everyone that the currency has only one direction: down. No wonder expectations have destabilised, with mounting pressure from capital outflows. With this, policy makers have no choice but to step up capital controls. After UnionPay was restricted to buy HK insurance products, recent media report indicate that the controls on overseas investment have also been tightened.

 Intervention could be ramped up: Given the size of RMB depreciation in the past 11 months, a further depreciation this Dec could lead to higher FX demand at the start of 2017, when the new US$50k quota would be made available. Therefore, it is likely that the PBoC would step up market intervention in the weeks ahead by guiding the RMB stable or even stronger against the USD, so that depreciation expectations could diminish a bit. It is not a Balance-of-Payment crisis, but still a highly uncomfortable situation.