In the previous part I discussed the balance sheet of the People Bank of China. Relative to GDP, PBC book is about 4x times bigger than Federal Reserve, with most of the assets in dollars and most of the liabilities in Yuan. In Spring 2010 one of the Bloomberg guests estimated that it sufficient for the Yuan to appreciate by 3% to make PBC insolvent. Since then Yuan appreciated by over 2.5%. Any further appreciation of Yuan requires the government bailout of the insolvent central bank, which will take the 1% of GDP hit for every 2% of Yuan appreciation. Is that a trap? The huge producing sector in China requires fixed costs to be maintained even if production falls. Cutting payroll is not a political option. There is no safety net. The hospital patient will be disconnected from oxygen if he cannot pay immediately. Agricultural lands are destroyed and cannot be reclaimed even if useless factories are shut down. Production cannot stop even if it means selling it abroad below cost. The bill is paid by capital inflows seeking for yield, usually managed by those who risk someone’s else money. China cannot grow indefinitely at a 10% rate by […]
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