“if capital outflows maintain their current pace, the PBoC would be unable to defend the yuan for more than two to three quarters”
That is a big if - capital flight has been accelerating. More draconian capital controls may be on the way (like Greece last year).
A big difference between China and Greece, or Argentina, is that there is no much larger EU or USA to bail them out.
I think that may be why the IMF recently (Nov 2015) decided to add the Chinese currency to their basket of reserve currencies (SDR) - so they could shuffle the cards, offload some of the losses and subsidize credit to China when their currency tanks.
The article talks about a 15% devaluation of the yuan in the next six months. That is the orderly adjustment, that financiers have been discussing. There is risk that the process could get out of control however, and the currency could dive much lower.
The bottom line is that the government does not have unlimited foreign exchange reserves to keep spending them to support their currency. If they run out of reserves, they could see their currency crash in a disorderly, unpredictable fashion.
Reserves don’t have to fall to zero before that happens - China needs to have more than a trillion dollars worth of foreign exchange reserves just to settle then next few months of import transactions (e.g. food - remember the food rotting in Greek ports, when they could not arrange payments). Other cash requirements get squeezed as the reserve balance drops toward that hard requirement, and lots of players race for the exits with their money as they see such possibilities approaching.
So it looks like they plan a 15% devaluation. If that doesn’t stabilize the currency, then they are at risk of not having enough reserves to control the decline the next time - Katie bar the door.
Do you see this affecting DJIA over the next months - in a bigger negative way then most think? I know you don’t have a crystal ball, but where would you guess the DJIA will be in four months - 1400 ??? I sure hope not lower!