Natural arm capacitor voltage balancing of the direct modulated modular multilevel converter (MMC) has been presented in some publications. However, the effect of submodule (SM) voltage control is not considered. This paper reveals that capacitor voltage balancing control may lead to SM voltage divergence between the upper and lower arms. A model of the direct modulated MMC is established, and subsystem of circulating current and arm capacitor voltage is linearized and analyzed. Based on the analysis, a control parameter design principle to effectively suppress arm capacitor voltage diverging and improve the system stability is proposed. The effectiveness of the theoretical analysis and proposed control parameter design principle is verified by simulation results.