2016-01-08telegraph.co.uk

China is perilously close to a devaluation crisis as the yuan threatens to break through the floor of its currency basket, despite massive intervention by the central bank to defend the exchange rate.

The country burned through at least $120bn of foreign reserves in December, twice the previous record, the clearest evidence to date that capital outflows have reached systemic proportions.

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In economic parlance, it is the Impossible Trinity. No country can have an open capital account, a managed exchange rate and sovereign monetary policy. One must give. In trade terms, China does not need to devalue, and it would not help much. The trade share of GDP has fallen to 41pc from 65pc a decade ago as the country moves up the economic ladder. Yet it needs internal stimulus to keep a hard-landing at bay, and that cannot easily be achieved if credit policy is kept tight in order to defend the exchange rate. Beijing will have to choose.

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