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Iris Pang, Economist at ING, suggests that the Chinese central bank should have known if it shut down cross-border capital flow channels, then the chance of substantial capital outflows would be small even it guides interest rates lower, and the yuan weakens further due to the strong dollar.

Key Quotes

“This could be the reason behind the policy to stop capital outflows via interbank accounts set up in the Shanghai Free Trade Zone as reported by the media on 17th August 2018.”

“We see this as a firewall to prevent capital outflows, give more room for a lower interest rate and a weaker yuan in the coming months when the trade war escalates.”

“USDCNH may not reflect full offshore market reaction of this policy, but USDCNY movements would be more indicative of this trend, and we believe the PBoC would allow USDCNY to follow the dollar trend broadly.”

“Once the Fed hikes, the dollar should maintain its strength even after the recent emerging market situation stabilises.”