A surge in China's capital outflows

In China, the latest deposit and FX transaction data suggest that capital outflows may have reaccelerated in July. USD onshore deposits dropped USD41.1bn in July, the largest monthly decline since these data were first made available and reflecting concerns about the volatile equity market and the softening economy. 

Meanwhile, the FX purchase-sales balance of the financial sector (including the PBoC and commercial banks) registered deficits of USD43.4bn in July and USD148.8bn YTD. 

"Capital outflows are expected to surge in Q3, driven by the change in the CNY FX regime and increasing expectations of currency depreciation. This is likely to tighten domestic liquidity conditions significantly and increase the need for more easing measures from the PBoC, which injected CNY120bn via reverse repo transactions on 18 August. Therefore, one 25bp cut is expected in benchmark interest rates in Q3 and 100bp of RRR cuts in H2 15, with risks for additional cuts", says Barclays.