Investors worried about a Chinese financial crisis want to know when and how it will happen. They have focused on the fast build-up of debt, much of it in shadow banking, and over-investment in housing. But China’s currency could turn out to be the trigger in the same way US subprime mortgages touched off the global financial crisis.

Beijing will not manage to rebalance growth towards consumer spending without the help of currency depreciation. To the surprise of many observers, the People’s Bank of China has engineered a modest but significant decline in the renminbi. But more weakness could be lethal for arbitrage and leverage strategies based on expectations that the currency was certain to keep rising.

Lombard Street Research estimates that the renminbi is between 15 and 25 per cent above fair value. Overvaluation has already hurt corporate profits, which have been flat for two years. Corporate debt as a share of gross domestic product has surged 15 percentage points during that time, while corporate deposits have hardly changed. This suggests that bank lending to companies is being used to pay interest on old loans rather than for new productive activity.