The PBoC appeared to be heavily active in the spot market after the currency regime change on 11 August in order to stabilize the CNY. Onshore CNY trading volume almost doubled in the 15 trading days following 11 August, compared to the previous 20 trading sessions and the YTD average. The increase in onshore trading volume most likely reflected incremental dollar selling by local and foreign entities that was ultimately absorbed by the PBoC. The last time trading volume spiked significantly was in March, and this was only a temporary increase lasting a few days. During that month, official FX reserves declined by $71bn, of which we estimate around $40bn was related to valuation effects. .

Suspected intervention in the forward market via swaps might be a way for the PBoC to delay the impact of FX intervention on the current reading of official reserves, but such action, if there was, seemed to be taken only in the last a few days of the month. In addition, the requirement of a foreign exchange risk reserve was announced on 1 September and should limit future swap activity.

A $200bn drop in official reserves, mostly related to dollar selling intervention to absorb capital outflows, would be a significant amount. The current account surplus in August could be about $40-60bn and so total capital outflows could be as high as $255-280bn last month, up significantly from $40 per month in H1.

If the PBoC's figure surprises on the upside (ie. less decline than expected), one possible reason could be that state banks, policy banks or SOE's bought dollars at the behest of the PBoC and kept the risk on their balance sheet. Capital controls may have also tightened for corporates and households. In this regard, the imposition of the foreign exchange risk reserve requirement should reduce speculative, hedging, and arbitrage outflows from the corporate sector in the forward market. The PBoC is stuck in the "impossible trinity",stabilising the exchange rate requires the PBoC to undertake a war of attribution against capital outflows.

"We think that $1tn is the absolute maximum the PBoC can sell. Therefore, in our view, the most likely near term strategy of Chinese policymakers is to allow more CNY depreciation to limit further appreciation in trade-weighted terms, in a largely controlled manner. And at the same time, (the implementation of) capital controls will probably be tightened on the margin, at least.We continue to see USD-CNY reaching 6.80 by year-end. We recommend owning USD-CNH 6m call spreads as an attractive risk-reward structure to position for a tail risk scenario of even more significant RMB depreciation",says Societe Generale.