A gathering yuan-induced global financial crisis? Still unlikely

After a tumultuous first trading week of 2016 that saw the falling yuan at the epicenter of a massive stock selloff worldwide, US finance behemoths Goldman Sachs and JP Morgan expect China to be able to engineer a gradual depreciation for the remainder of the year.

Meanwhile, a Bloomberg report reiterates the unlikelihood of a genuine financial panic or crash in light of China's tightly controlled financial system. Reminiscent of the same such arguments over the last couple of years, the validity of this thinking promises to be tested with perhaps ever greater frequency now after two bouts of yuan devaluation scares since August.

The underlying problem has been underscored again today with a deflation-induced selloff in Chinese stocks. "Old China" of so-called secondary industry - manufacturing and construction - is already in a hard landing and the great danger is that it will blunt the ascent of tertiary industry - services and consumer spending - by stagnating income growth.

This is somewhat debatable. What's effectively happening is a massive transfer of wealth from the old economy to the new: as jobs disappear and wages freeze in the former, jobs are created and wages rise in the latter. Of course there are winners and losers: if the winners are individual consumers and the losers are massively indebted state corporations, that's exactly how it should be. The big question is how comprehensively secondary industry's decline can be absorbed by tertiary industry's growth: if it turns out that there's just not enough new demand in the services sector to make up for the contraction in manufacturing and construction, the latter two must still be boosted - and already, it seems the only effective option left for manufacturing is currency devaluation.

Either way, there is no question now that the yuan is coming down in a big way over the next two to three years, because even should the transition to Xi Jinping's "new normal" largely succeed, a more open capital account means that Beijing wants much, much more Chinese capital to be invested overseas anyway - simply because the returns are better. So JP Morgan is right that potential capital outflows are becoming "boundless".