According to the latest data from China's SAFE, net FX outflows from China picked up to US$21BN in September (vs. US$11BN in August) and the highest since mid-2017 with Goldman noting that "outflow might have increased moderately further in October, but has unlikely reached the level seen in late 2015/early 2016 in our view."
It may not have reached the furious outflows from the peak of the post-depreciation period, but as Goldman concedes, this risk will rise over time if the authorities continue to resist interest rate differential-driven depreciation pressure.
And, to counter the risk of a return to China's dramatic outflow phase, Reuters writes this morning that China is likely to resume selling some of its vast $3 trillion currency reserves to stop any precipitous fall through the psychologically important level of 7 yuan per dollar "as it could risk triggering speculation and heavy capital outflows."
Indeed, as noted in our morning wrap, on Friday the yuan hit a fresh 22-month low of 6.9641 against the dollar. Additionally, earlier in the session the offshore Yuan tumbled as low as 6.9769 after the PBOC fixed the onshore Yuan north of 6.95 and weaker than consensus expected, at which point however Beijing intervened, when at least one big China bank sold the US dollar in the afternoon, prompting the yuan to reverse loss, and triggering stop-loss orders by short-sellers of the yuan.
And with the Yuan just inches away from the key level of 7.00 vs the dollar, dropping 6% against the dollar so far this year, reflecting its slowing economy as well as pressure on exports due to an ongoing tariff war with the United States, Beijing is starting to sweat.
According to Reuters, to counter any potential spike in outflows, "a defense of the yuan at 7 per dollar would be mounted to show investors that the authorities wouldn't allow a runaway market."
"If the yuan falls through 7, there could be a rapid depreciation of the exchange rate", said one policy insider. "In order to avoid such a passive situation, the authorities are likely to step in the market to stabilise the yuan."
And, according to a second Reuters source, should the Yuan hit 7.00 against the dollar, the PBOC would make a stand, rather than allow any sudden break through a psychologically important level to feed pessimism among investors.
"The central bank will intervene - intervene directly or indirectly. It's necessary. The central bank has many policy tools. We cannot let the yuan fall past 7, as it would have a psychological impact on people," the second source said.
That said, China is now juggling two opposing tasks, with Beijing's priority now to ward off a sharper slowdown in the economy, which grew only 6.5% in the third-quarter, while at the same time it is worried about the impact of the weaker currency on capital outflows.
To address the slowing economy, the central bank has cut reserve requirements for lenders four times this year, and is expected to ease monetary policy further, while on the fiscal side the government has pledged more tax cuts next year to support growth. Those actions, however, have caused the yuan to weaken to just shy of a decade low.