HONG KONG (MarketWatch) — When it comes to China’s currency, consensus opinion is typically formed around what the government tells us. When it says the yuan will not be devalued, it means it. Betting against the stated policy of Beijing or its central bank has rarely been a profitable move.

But some analysts are now warning investors to position for the unexpected: a sudden and sharp devaluation of the yuan USDCNY, USDCNH, -0.01% .

Bank of America Merrill Lynch Global Research warns in a new report that it sees a “non-negligible” risk that China’s government will surprise the market by slashing the value of its currency.

To reach this conclusion requires not just a hard-nosed appraisal of China’s economic numbers, but also to consider the unthinkable, namely that Beijing might actually lose control of the situation.

The story so far this year for China’s economy has been one of steadily worsening data and seemingly ineffective stimulus. As well as suffering shrinking exports, the economy edged closer to outright deflation in January after the consumer price index fell to a five-year low inflation rate of 0.8%.

Beijing’s traditional levers to stoke the economy no longer appear to be working.

Despite cuts in interest rates and bank-reserve requirements, as well as bank lending surging to five-and-a-half year highs in January, authorities are struggling to stop liquidity contracting. On Friday, it was revealed that broad M2 money supply had grown just 10.8% in January from a year earlier, the slowest rate of growth since records began in 1998.

It looks like efforts to add liquidity are wasted in the face of persistent capital outflows and existing high debt levels. Fiscal policy, meanwhile, has limits due to restraints on local-government debt levels.

Bank of America concludes that yuan depreciation is one of the few tools left for China to ensure it gets a good share of global demand and meets its growth and jobs targets.

Still, for Beijing to go down this route means a major and unexpected policy reversal.

Indeed, Bank of America questions whether explicitly raising the prospect of devaluation is, on its own, alarmist. The analysts’ devaluation scenario arises from the possibility Chinese policy makers may effectively lose control of the situation.

This might sound unlikely, given the degree to which Beijing’s form of state-capitalism extends firm control over the economy and financial markets. But Bank of America contends the state’s iron rule may contain the seeds of such an unexpected policy reversal.

By borrowing from the thinking of Nassim Taleb of “Black Swan” and “Antifragile” fame, it argues that such attempts to engineer stability have ended up creating a highly fragile situation.

Although on the surface China looks stable when you consider its consistently high growth rates, limited bad-debt levels and a pegged currency and capital controls, the instability comes from leaving no means to release tension. The implicit backing of debt by the state means this has obscured normal price and risk discovery.

The theory continues that when everyday volatility is suppressed, this can lead to hidden, unobservable risks which can unravel violently and without warning.

In the financial world, recent examples might include the dramatic collapse in crude-oil prices as OPEC chose to no longer suppress supply or the spike in the Swiss franc USDCHF, +0.34% after the government exited its euro EURUSD, -0.06% peg. Could the Chinese yuan be next?

If the yuan were to depreciate sharply, this would be a major escalation in the global currency wars, given the size of China’s economy.

Bank of America says the ripple effects could be substantial, with many carry trades unwinding, commodity prices falling further and hot-money outflows accelerating. This could also put pressure on property prices and lead to higher interest rates and a surge in bad debts.

Hong Kong could also expect to feel the fallout as it has witnessed an unprecedented surge of carry-trade lending into mainland China in recent years. This has seen exposure rise from 20% of Hong Kong GDP in 2006 to 160%.

Unlike what we saw in Japan, currency depreciation is unlikely to lift equity indices, as typical beneficiaries of yuan devaluation are lightly represented in the stock market.

However, there is still room to position for likely winners and losers in the event of a yuan move. Banks, property, commodities and companies with heavy foreign debt would be hurt, but exporters such as telecom-equipment manufacturers and industrials would benefit. Companies less exposed to foreign competition, such as dairy producers, should be relatively immune.

On a broader basis, multinationals with costs rather than revenues in China will be better positioned for a yuan fall.

Expect investors to be closely watching developments that could push Beijing closer to a yuan devaluation, such as a further deterioration in economic data, more dollar DXY, +0.03% strength or signs of capital outflows.