Noticeable over recent months is that all those commentators and talking heads who have claimed for so long that China’s currency is massively undervalued have gone into hibernation. Because what has become abundantly clear is that the analysis that lay behind this claim was fundamentally flawed and incomplete. Recent developments in China will now hopefully trigger a more rational appraisal of the valuation of the currency, which so far this year has actually depreciated against the dollar, the pound and other major Asian currencies (except for the Japanese yen). Indeed, given the deteriorating state of the economy, further RMB depreciation cannot be ruled out.

Two main forces have been weighing on the renminbi:

Firstly, the economy is enduring a much rockier landing than expected. Most striking has been the stream of consistently weak key domestic economic indicators such as electricity production, rail cargo volumes, residential floor space construction, land sales and house prices. Business investment, a huge contributor to the Chinese growth story over recent years, has slowed markedly, hurt by declining global demand, higher operating costs and reduced profitability.

Policy officials have been a little slow to respond to the deteriorating growth picture, perhaps distracted by the upheaval and political machinations within the Politburo. That said, policy-makers have enormous scope to stimulate the economy as and when they feel it is necessary; bank reserve requirements remain extremely high (notwithstanding the recent 50bp reduction), fiscal policy has a lot of potential to provide the economy with a powerful boost and key interest rates can be lowered significantly (although only once the inflation genie has been contained). With domestic demand-growth clearly more tentative it is not surprising that foreign capital-inflow has slowed markedly and that the currency is no longer rising.

Secondly, those Chinese who have amassed wealth in the country over the past decade are becoming much more active in attempting to convert their bounty into hard currencies. Conscious that conditions in their own country are not nearly as favourable, high net worth investors have been transferring their wealth to safer havens such as property in major global cities, dollars, Japanese yen and the pound. In London, a major explanation for the rise in property values over the past year or so is the dominating presence of cashed-up Chinese buyers. Over the next couple of years, we can expect a lot more of this type of activity which will put downward pressure on the Chinese currency.

From a political perspective, Beijing will be aware that a depreciating currency will create huge tensions, especially with the US. Also, China’s massive foreign exchange reserves could be used to thwart any downward pressure on the currency.

At the very least, the indifferent display by the renminbi this year has neutralised expectations regarding future currency performance. Presently, the forward market actually anticipates that the yuan will fall by 1% over the next year. As we have been suggesting for some time now, during such a turbulent year, and not just economically and financially but also politically, Beijing was always likely to favour a relatively stable exchange rate.

Yesterday’s decision by the Rajoy government to take a 45% stake in troubled lender Bankia and to provide capital as necessary is just the tip of the iceberg in terms of cleaning up the bereft Spanish banking system. The third-largest lender in Spain and arguably the most vulnerable because of its huge exposure to the tumbling property market, the government correctly formed the view that urgent steps were required to attempt to stabilise Bankia.

Unfortunately, the extent of non-performing property loans sitting on Spanish bank balance sheets is ballooning at an alarming pace. Earlier this year, the government demanded that lenders raise their loan-loss provisions by a further EUR 54bn to EUR 155bn. However, according to the Bank of Spain, this will only cover roughly half of the loans made to property developers, without any provisioning for the huge EUR 1.45trln of mortgages and corporate debt on bank books. Indeed, research by the Centre for Policy Studies claims that proper provisioning for non-performing loans in these two categories would entail banks setting aside a further EUR 270bn.

If the Spanish government attempted to fill this gap, it would lift the debt/GDP ratio from near 70% currently to around 120%. To make matters worse, flush with ECB cash, local banks have increased their purchases of Spanish bonds by a third in recent months. As such, if bad debts at banks continue to grow (a given), and the government is forced to inject funds (money is does not have), then the public debt grows exponentially and the sovereign’s solvency is threatened, further undermining the bank’s position. With the economy stuck in a deep recession and borrowing costs quite elevated, Spain would rapidly find itself trapped in a deadly debt spiral, requiring huge financial assistance from the EU and the IMF.

The frightening consequence is that, if the latter come to the party and helped Spain out it would virtually exhaust their financial resources. Little wonder that risk assets are tremulating once more.