It would be tempting to ascribe the large drop in global risk assets last week to the onset of Federal Reserve tightening and a further meltdown in commodity prices. No doubt these factors played a part, but the dominant force was probably the same one that shook the markets in August – the fear of a sudden devaluation of the Chinese renminbi. This would export deflationary forces from China’s industrial sector to the rest of the world, and would interact very badly with the start of a monetary tightening cycle in the US.

Throughout last week, the renminbi weakened against the dollar, especially in the offshore currency market that is most affected by flights of capital from China. The PBOC’s foreign exchange reserves were reported to have fallen by $87 billion in November, much more than expected, suggesting that an exodus of capital was occurring ahead of the likely Fed tightening on 16 December.

Many investors were asking whether China’s resolve to maintain a stable exchange rate was weakening, now that the renminbi has achieved its long term goal of membership of the SDR. Fears of devaluation were mounting fast.