Financial markets have been rocked since the start of the year by weakness in the tightly managed yuan. Some speculators think the trend in Beijing's daily exchange rate fixings could be paving the way for a devaluation in March or April.
Nowotny said Beijing has been pursuing three major financial goals at once - a stable exchange rate, an independent monetary policy, and free movement of capital - when in fact one can only have two of those at any given time.
"Something will give," he told an economic reporters' club in Vienna.
"We see that the trends towards free movement of capital are weakening again, and the big fear is rather that on the Chinese side the exchange rate will be set on a more aggressive depreciation," he said.
"That would of course have massive effects on many countries."
Speculators who believe China will devalue the yuan are placing bets via the currency's cheaper offshore forwards market, and they expect the big move in March or April.
They say the trend in China's daily benchmark rate fixings and weakness in the currency resemble the pattern in the days preceding its surprise devaluation last August.
Fears of a slowdown in the world's second-largest economy have caused global markets to fall this month, though Nowotny said those movements had been excessive.
"Stock markets and exchange rates have a tendency to overreact, so I think we have a certain overshooting here," he said, adding that China's real economy was in the middle of a structural change, with industry's share of the economy falling.
DEFLATIONARY PRESSURE
A lower yuan, like a lower oil price, would put downward pressure on inflation in the West, as goods made in China would become cheaper.
Nowotny said there was a chance the collapse in oil prices would bring deflation in the euro zone.
"It is absolutely possible that ... in the coming quarters we will have months in which the inflation rate will be negative," Nowotny told an economic reporters' club.
"It depends on how the oil price develops," he said, adding that oil had pushed down the cost of industrial goods but, in the services sector, where some costs could have been expected to rise, wages had not kept up with economic improvements.
He declined to elaborate on the position expressed by ECB President Mario Draghi on Thursday - that fading growth and inflation prospects would force the ECB to review its policy stance in March - but he said the position was unanimous.
(Reporting by Francois Murphy and Kirsti Knolle; Editing by Hugh Lawson)
