China’s Insolvable Problems; Watched Pot Thesis; Roll the Dice

Courtesy of Mish.

China has not one insolvable problem, but many of them.

Yuan and Capital Flight

• China needs to prop up the yuan to slow capital flight.
• China needs to let the yuan drop to support exports.
• China needs to float the yuan and remove capital controls to prove it really deserves to be taken seriously as a reserve currency.
• If the yuan sinks, capital flight will increase and China risks the ire of US congress and those play into protectionist sentiment, notably Donald Trump.
• Artificial stabilization of the yuan will do nothing but create an oversized move down the road as we saw in Switzerland.

SOEs and Malinvestments

• China needs to write off malinvestments in state owned enterprises (SOEs).
• If China does write off malinvestments in SOEs it will harm those investing in them, generally individual investors who believed in ridiculous return guarantees.
• If China doesn’t write off malinvestments it will have to prop up the owners of those enterprises, mainly the ruling class, at the expense of everyone else, delaying much needed rebalancing. 

Property Bubble

• China needs to fill tens of millions of vacant properties, but no one can afford them.
• If China makes the properties affordable it will have to cover the losses, or builders will suffer massive losses.
• If China subsidizes losses for the builders, there are still no real jobs in in the vacant cities.
• If China does not subsidize the losses, the builders and current investors will both suffer massive damage.

Jobs

• China is losing exports to places like Vietnam that have lower wage points.
• Property bubbles, the overvalued yuan, SOEs, and capital flight all pose conflicting problems for a government desperate for job growth.

Stock Market

• China’s stock market is insanely overvalued (as are global equity markets in general). Many investors are trapped. A sinking stock market and loss of paper profits will make overvalued properties even more unaffordable.
• Propping up the market, as China has attempted (not very effectively at that), encourages more speculation.

Pollution

• Curtailing pollution will cost tens of millions of jobs.
• Not curtailing pollution will cost tens of millions of lives.

What Did I Miss?
…