Watch What China’s Currency Does, Not What Policymakers Say

Remember the big currency devaluation from China this past summer that crushed markets? No? Neither do investors, for the moment.

It seemed so long ago — those harrowing days that shook indices globally, where Greece and China loomed as twin terrors on the global landscape. We’ll stick with the latter for now, since Greece is now just another beautiful calm isle where everything is fine. Right?

China’s currency has rebounded, with at least some optimism, possibly tied to the lunar new year.

And there was at least some propping up of the currency over this past weekend, as the People’s Bank of China Gov. Zhou Xiaochuan said that there would be no goal to devalue the yuan or to impose capital controls, CBS Marketwatch reported Monday. The ruling out of capital controls implies that the central bank is not in fact worried about drastic changes of heart among investors, or runs on assets.

Yet the governor also said that his organization would be “cautious” when looking to fend off speculation, with the added comment that the bank wants a “flexible” currency. Those comments come in the wake of the yuan moving a not inconsiderable 1 percent higher against the dollar, with 6.5 yuan and change tying to the greenback.

But actions speak a bit louder than words, as China is still in the midst of running through foreign reserves, in an effort to help keep the yuan strong, with $3.2 trillion in the till after spending $99.5 billion in January – and yet there’s still outflow going in, which means that investors are seeking returns elsewhere. The tradeoff is becoming apparent as looking to save the yuan actually keeps less capital in the country, which means less available to go around to do things like stimulate economic growth. Eventually, it may take a weaker yuan to curb flight and while a devaluation may or may not take place, a freer float may take place – and some analyses, such as those proffered by hedge fund manager Kyle Bass, and investment houses such as Societe General are looking for double-digit declines in the yuan on a percentage basis by the end of the year.

Should there be a meaningful drop in the yuan, then we could expect to see a repeat of the asset selloffs that marked a harrowing summer of 2015 as buying power plummets and among the subsets most vulnerable would be high yield debt and commodities, of course, and China’s much ballyhooed, likely still overvalued property markets.

So, while all eyes are on wild and wooly tech valuations here in the United States, and the roller coaster impacting energy, something a bit bigger (and badder) could be coming down the pike.