Bottom Line: Monthly outflows eased in July amid intensified controls onoverseas investment in the "negative list" sectors. We expect the tighter capitalscrutiny will keep the outflows subdued, and that the property sector ODI willbe the most affected. This, combined with our Global FX team's estimate of alower USD trajectory, will likely bring USD/CNY to 6.60 by end-2017, followedby a modest depreciation to 6.80 by end-2018.    July outflows moderated... FX-denominated outflows (adjusted for forwardcontract positions) eased to US$0.03bn in July (vs. US$5.3bn in June), with broadbasedimprovement in both the current account and capital & financial account.    Meanwhile, RMB-denominated outflows edged down to US$13.8bn in July (vs.    US$14.7bn in June). As a result, our estimated total cross-border outflowsslowed to US$14bn in July from the average of US$21bn in May-June, whilesimilar to the level of US$13bn in March-April.    ...amid a new wave of capital controls: In light of the mild rebound in capitaloutflows in May-June and potential further Fed rate hikes, Chinese policymakershave intensified controls on firms' "irrational" overseas investment in the“negative list” sectors since late June. In contrast, the government advocatedoutward investment related to the One Belt, One Road (OBOR) initiative on July20. As a reflection of the shifting structure of outward investment, the share ofOBOR-related investment in China's total outward direct investment jumped to13% in Jan-Jul 2017 from 9% in 2016.    Outlook and policy implications: We believe the monthly average outflows willremain subdued at US$10-15bn in 2H17-2018 (vs. US$55bn in 2016) amid capitalcontrols, and that property sector ODI will be the most affected by the recentcrackdown. Real estate transaction volumes are likely to come under pressure inthe top destinations for Chinese investment, namely the US, Hong Kong,Australia and the UK markets (see Economics and Property: Why China's CapitalControls Matter to Global Property Markets, July 31, 2017). Meanwhile, in linewith our Global FX team's updated USD trajectory (~2% depreciation toward theyear-end and 4% appreciation in 2018) and the PBoC's FX strategy (allowing amodest CNY appreciation during USD weakness, while tolerating a faster CNYdepreciation amid USD strength,Exhibit 2 and Exhibit 3), we expect USD/CNY toreach 6.60 by end-2017, followed by a modest depreciation to 6.80 by end-2018(see FX Pulse: FX Forecast Update, August 10, 2017).    1

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