The renminbi—one of the world's most tightly controlled currencies—may be hit by significant weakness, with predictions that Beijing will stand down from its traditional interventionist stance.
"We're looking for about 5-10 percent depreciation over the next one year even though it might be stable over the next few months," Adarsh Sinha, head of Asia Pacific G10 FX strategy at Bank of America Merril Lynch (BofAML) Global Research, told CNBC.
"History tells us that whenever China is facing any economic volatility, they always keep the currency as flat as a pancake. However, the tricky thing for China is that their capital account is gradually opening up, which makes it difficult for them to credibly stabilize the renminbi now."
Further monetary easing is widely expected as part of Beijing's toolkit to halt the panic-selling in mainland stocks, and economists widely agree that will place severe downward pressure on the onshore renminbi (CNY). But if China wishes to gain MSCI status and internationalize the yuan, it cannot continue intervening in currency markets as it's done in the past, experts say.
"Government intervention steps contradict intentions to allow market forces to determine the allocation of resources. Herein was the first major test of embracing market discipline," said Jeremy Stevens, international economist at Standard Bank in a note, referring to the impact of intervention on Beijing's international ambitions.
The CNY has traded in a narrow range around 6.2 per dollar in recent sessions but the offshore yuan (CNH), traded outside the mainland, has hit fresh three-month lows against the greenback this week. That said, the CNH is a more freely floating currency so it's much harder for the PBoC to intervene compared to the onshore yuan.
"Beijing is indeed minimizing foreign exchange intervention as part of the internationalization plan," said Bernard Aw, market strategist at IG, via e-mail, adding that there are rumors about a widening of the currency band to -/+3 percent from 2 percent currently. IG believes MSCI was right to reject the A-50's bid to enter its emerging markets index last month, calling Chinese markets "immature" due to Beijing's inability to control market declines through regulation and the PBoC's blatant support.
Indeed, the negative impact of any currency interventions on domestic liquidity could offset monetary easing, BofAML explained, referring to the recent flood of criticism towards Beijing's heavy-handed actions in markets.