China's capital outflows likely to persist in H2

Ahead of the IMF's SDR review, the PBoC made a commitment to liberalising the pricing mechanism of the USD/CNY fixing rate to be more driven by the market. The CNY is overvalued vs the USD at the current level, hence greater market determination means currency depreciation. 

"Given the expectation of slowing relative growth in China (with downside risks) and domestic households' increasing preference to diversify towards USD assets, a freer flow of capital is expected to be skewed towards currency outflows, more than offsetting the current account surplus and putting downward pressure on the CNY", says Barclays. 

The latest deposit and FX transaction data already point to accelerating capital outflows in July, reflecting concerns about the volatile equity market and softening economy. Looking ahead, capital outflows are expected to persist in H2.