China burned through $108 billion in December, according to China’s central bank, as the country tried to stabilize the yuan as it depreciated against the dollar.

That works out at to about $3.5 billion per day.

That effort didn’t stop the yuan from ending the year down 4.5% against the dollar. And it hasn’t stopped the currency from continuing to decline in the first days of 2016.

That said, it has allowed the currency to glide down more gently than it would if the government weren’t propping it up by buying it.

The Chinese want the yuan to depreciate. Their economy is slowing and a weaker yuan means more competitive goods and jobs for Chinese workers.

On the other hand, because China’s economy is slowing the government needs cash. That means it has to avoid capital flight as yuan-holders trade it in for a more stable currency.

It’s an incredibly expensive task, one that analysts have said could leave China in a position where it’s forced to bleed money until the yuan finds some sort of stable level against the dollar, or against a basket of alternative currencies.

But we don’t know when China’s slow down will stop, so we don’t know how long it will take the yuan to find a fair value. We don’t know how long China will have to bleed money.

The signal in the noise

The Chinese stock market has dominated headlines since the beginning of the year. Twice officials have had to use circuit breakers to stop the market from plummeting more than 7%.

The second time those circuit breakers were triggered, it was in response to China depreciating its currency 0.5% against the dollar.

Traders in London, New York, and Hong Kong will tell you that the Chinese stock market has nothing to do with the real economy. The yuan, however, definitely does. Allowing it to depreciate is a sign that Chinese officials know that stimulus measures they’ve been taking over the last year or so — like rate cuts — are not doing enough.

As Bank of America Merrill Lynch pointed out, we can see this in the Chinese labor market, where the ratio between job seekers and job offers has increased.

BAML

The sauce is in the strategy

So it’s clear Chinese officials feel they must do something about the yuan. The question is what and how.

“In our view, as long as the PBoC insists on managing a gradual depreciation path, rather than allowing quick adjustments, it will continue to be a tough battle against capital outflows,” Societe Generale analyst Wei Yao wrote in a recent note.

Analysts at Bank of America Merrill Lynch think the government has $1 trillion to $1.5 trillion in reserves to defend the yuan — give or take — out of $3.4 trillion in foreign-exchange reserves. They think that stash will last China a year or two at its current burn rate.

The thing is, as China’s economy weakens, that rate may have to pick up speed. That would put the government in a vicious cycle where it has to allow the yuan to weaken, then throw money at it to stop capital flight, and then allow it to weaken again, then throw more money at it …

Where does it end?

SHANGHAI (REUTERS, BLOOMBERG) – China accelerated the depreciation of the yuan on Thursday (Jan 7), sending currencies across the region reeling and stock markets tumbling, as investors feared the Asian giant was kicking off a trade war against its competitors.

Trading on China’s stock markets was suspended for the rest of the day, for the second time this week, as a new circuit-breaking mechanism was tripped less than half an hour after the open.

Shanghai stocks slid 7 per cent to trigger the halt in trading, a repeat performance of Monday’s sudden tumble. Japan’s Nikkei slid 2.3 per cent in sympathy.

Chinese shares listed in Hong Kong slumped 4.3 per cent – the most since August – and the Hang Seng Index dropped 2.9 per cent.

The morning selloff accelerated in Singapore with the Straits Times Index down 2.3 per cent at 2,739.51 as at 2:45 pm. Benchmark indexes in Australia, South Korea and Taiwan lost more than 1 per cent.

The People’s Bank of China (PBOC) again surprised markets on Thusrday by setting the official midpoint rate on the yuan, also known as the renminbi (RMB), at 6.5646 per US dollar, the lowest since March 2011.

That was 0.5 per cent weaker than the day before and the biggest daily drop since last August, when an abrupt near 2 percent devaluation of the currency also roiled markets.

Regional currencies promptly went into a tailspin. The Australian dollar, often used by foreign exchange dealers as a liquid proxy for the yuan, fell half a U.S. cent in a blink.

The PBOC’s China Foreign Exchange Trade System (CFETS) repeated on Thursday that there was no basis for the yuan’s continuous depreciation and that it was stable against a basket of currencies in 2015.

But the central bank’s fixings have helped drive the yuan down not just against the dollar this week, but also other major currencies, including a 3.5 per cent fall against the yen and 0.8 percent against the euro.

Markets are struggling to determine what policy Beijing is pursuing.

“Frankly speaking, we are still not quite sure where the PBOC boundary is at the current stage. The fear of the unknown has become the largest risk for RMB in the near term, despite China’s sizable current account surplus,” said Singapore-based Oversea-Chinese Banking Corporation (OCBC).

ANZ bank said in a note: “The policy action will also create one-way expectation of RMB depreciation, propelling capital flight and leading to significant financial instability.”

This week’s slide comes ahead of the expected release later in the day of China’s foreign exchange reserve data for December, which traders fear will show a further sharp decline as investors pull money out of the slowing economy.

China’s reserves, the world’s largest, fell by US$87.2 billion in November to US$3.44 trillion, the lowest level since February 2013 and the third-largest monthly drop on record.

Some fear the yuan’s quickening slide suggests the world’s second-largest economy is in deepening trouble, though for now economists say there has been no material change in their expectations of a gradual but bumpy slowdown, with no hard landing.

A sustained depreciation in the yuan puts pressure on other Asian countries to devalue their currencies to stay competitive with China’s massive export machine.

It also makes commodities denominated in US dollars more expensive for Chinese buyers, which could hurt demand and thus further depress commodity prices in a vicious chain reaction.

The halt mechanism, intended to calm market volatility, was having the opposite effect, according to a 22-year-old retail investor in Guangzhou surnamed Hu.

He said he bought shares on Wednesday when the market rebounded, but was now trapped by the circuit breaker, which he said was “killing investors” and creating panic.

China’s securities regulator also unveiled new rules on Thursday to restrict selling by big shareholders who have been locked into their holdings for six months since Beijing banned them from offloading stocks to arrest a summer market crash.

In rules that take effect on Jan. 9, they can’t sell more than 1 percent of a listed company’s share capital every three months.

The new rules didn’t go down well with investors. “This is crazy. Chinese regulators set off on this path in July and they cannot get out of it. They have ruined whatever hope investors still had in the market,” said Alberto Forchielli, founder of Mandarin Capital Partners.