A stronger dollar adding to yuan pressure is an ongoing risk to liquidity in China and the rest of the world.

The yuan fell versus the dollar overnight, with USDCNY nudging near 15-year highs. This is not something welcomed by Chinese policymakers, as evidenced by the gap between USDCNY and the official fixing at near-historical extremes.

China is mired in a slowdown that has caused capital outflow to increase.

Even though the country officially has a closed capital account, where there’s a will there’s a way, and when growth slows more capital tries to leave the country, with over-invoicing for exports and under-invoicing for imports among the common ruses used.

Given the capital account is nominally closed, we have to try to infer the level of capital outflow. One way is to look at the difference between official FX reserves, FX deposits at banks and the trade balance. In theory, the net proceeds from trade should end up either as FX reserves or deposits. Therefore, what doesn’t can be attributed to capital leakage.