We used to talk about the "2% rule" in China. A decade ago mainland firms and households converted more than 2% of outstanding renminbi into dollars over a 12-month period, the largest bout of capital outflows in the past three decades, leading to big FX reserve losses and a near-crisis. What would happen if we saw a repeat of this panic, i.e., if 2% of savers were to leave the system today?

Underlying costs are still growing rapidly. As the size of renminbi liquidity in the economy spirals upward while the exchange rate remains stable, the implied cost of defending the currency against a significant bout of capital outflows is also shooting up - and by the end of the decade would mean losing most of China's remaining FX reserves and perhaps a collapse in the renminbi exchange regime.

But if this is the case, then why don't we spend more time talking and writing about this looming disaster? The answer is that China has tightened capital restrictions aggressively since 2016 and continues to close the doors and windows today. It's much harder for residents to get money out than it was a decade ago, and as a result we no longer believe another "2% outflow surge" is likely. Instead, we talk more and more about the closing of the mainland economy and the ongoing "North Korea-ization" of China as the key trend of the coming decade.