However,economist George Magnus does not believe China will devalue the yuan in ways "that people think it will be forced or choose to."
"Instead, and if pushed by the capital flight that's bleeding its reserves, China's basic instinct will be to carry on tightening capital controls, and punishing those that try to breach them," he wrote in a note on Friday.
And what is happening in China is having repercussions across the world, not least Europe, said Paterson.
"If a country could just print as much money as it wanted, and at the same time, preserve the external purchasing power of its currency, clearly there would be no poverty in the world…we would have all done this," he said.
"The failure of Europe to generate nominal GDP (gross domestic product) growth is why the leverage is so damaging. The credit risk is rising in the risk-free sovereigns, which the banks are all up to their eyeballs in … and so a deflationary shock from China that makes nominal GDP growth in Europe an ever more distance prospect , of course that manifests itself in real stress in the European financial system," he said.