Between now and June 16, there likely will be banners scrolling and TV personalities talking over each other, debating whether the economy and the market can take a rate hike in June. A lot of the debate and hyperbole likely will miss an important point: it’s not so much the Fed as the yuan that investors should be watching. The big question on my mind is will the People’s Bank of China (PBOC) depreciate China’s currency relative to the U.S. dollar in anticipation of a Federal Reserve (Fed) hike?

Why care about the yuan? It helped cause the last correction.

On December 11, 2015, the PBOC announced the creation of the China Foreign Exchange Trade System exchange rate to provide an alternative to targeting the yuan versus the dollar. Why is this date significant? It was, quite conveniently, a few days before the Fed hiked rates on December 16.

Capital flows in and out of China

Investors watching events unfold in China are likely wondering: what exactly are Chinese officials doing with the country’s currency, and how does this affect China’s path to growth, its stock markets, and the health of Chinese companies? To get a better sense of China’s currency strategy, investors should take a closer look at the topic of capital flows in and out of China.

Net capital outflows from emerging markets in 2015 were large, amounting to $735 billion, and this was mainly driven by China. China’s outflows represented $676 billion of the $735 billion in outflows. Those are big numbers; some investors see them and worry. I look at those numbers and think about how this is just a natural part of the maturing of China’s economy and doesn’t spell doom or gloom.

The capital flows into China have been mainly equity investments. Most people seem to equate capital flows with debt buildup, but they are not the same thing. From a macroeconomic perspective, there’s a lot less risk when capital flow is equity-based because you don’t have to worry so much about defaults and impairing the health of creditors, which tend to be banks. Emerging markets debt crises of the past have occurred when capital flows into the countries were primarily debt, not equity. This makes China’s capital flows historically unique.

Puppy and a football

Stocks posted sharp losses as China’s equity market woes continued with a sustained spillover effect into the global markets. Today’s sell-off catalyst was currency—specifically, traders’ reaction to Beijing’s continued efforts to depreciate the yuan. The Chinese yuan weakened to a five-year low after the People’s Bank of China cut the currency’s reference rate for the eighth-straight day and by the most since August. The central bank also said that China’s foreign exchange reserves shrank more than forecast in December by a record $108 billion.

Anxiety over the yuan quickly spilled over into the equity markets. Days after introducing a circuit-breaker mechanism to curb sell-offs, China’s securities regulator suspended it. The reason: Within just 30 minutes of today’s market open, China’s CSI 300 Index tumbled 7.2%, triggering an automatic trading shutdown for the entire day. This marks this week’s second shutdown amidst growing discord from analysts who blame the circuit breakers for intensifying losses, as investors rush to the exits before getting locked into positions.

For more insight on China’s market sell-off—and how it relates to U.S. investors—read Dr. Brian Jacobsen’s new post on the AdvantageVoice blog.

Here in the U.S., the Dow dropped 392 points, with all but 1 of its 30 components retreating; the S&P 500 Index lost 47 points; and the Nasdaq sank 146 points. Decliners topped advancers by about seven to one on the NYSE and the Nasdaq. The prices of Treasuries strengthened. Gold futures climbed $15.90 to close at $1,107.80 an ounce. The price of crude oil slipped 70 cents, settling at $33.27 a barrel, weighed by concerns over demand from China, the world’s second-largest oil consumer.

In earnings news:

S&P 500 Index recovery after 1953 correction

China’s stock market collapse has me thinking of golf, mainly because most investors would like to take a mulligan on this year. A mulligan is an extra stroke allowed after a poor shot. I don’t golf, and it’s probably safer that way. My first excursion included me hitting a friend in the back of the head with a ball as I teed off. The odd thing is, he was standing behind a tree where he thought he was safely out of harm’s way. Thankfully, he was OK, as the ball didn’t have a lot of momentum because it had ricocheted off a couple of trees before striking him.

That’s the way this year feels. You can have a nice strategic allocation, thinking your portfolio is safely lined up with your long-term financial goals, and then BAM, Brian tees off and hits you in the back of the head. Well, in this case, it’s not me, it’s China’s market volatility, which has spilled all over the global stage. Oil falls, Treasury yields drop, and stock markets get dragged down.