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Friday, January 08, 2016 12:41 AM

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

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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 the vacant cities.
  • If China does not subsidize the losses, the builders and current investors will both suffer massive damage.


  • 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.


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

What Did I Miss?

I am quite certain I have missed many insolvable conundrums even though I suspect those are the key ones.

Various Fed officials tell us China is not a concern because the problems are known.

Are the problems known? As I outlined above? If so, then let's see a solution.

Decoupling Revisited

Many believe the US will decouple from the global economy.

I find that as believable as the ridiculous notion proposed by Peter Schiff and others in 2007 that China would decouple from the US economy.

Currency Crisis Coming Up

I keep repeating a currency crisis is coming up. Many others are on that bandwagon.

The key issues have always been when and where?

For a long time all eyes were on Japan. Then various (and ridiculous) hyperinflation theories on the US surfaced. Then Europe and Greece. Venezuela and Argentina are in the news but they are not big enough to matter.

China certainly is big enough. So are Italy and Spain. Of course, so is the US.

Watched Pot Thesis

It appears to me that smack in the midst of a huge set of problems, most seem to discount China for one reason or another.

China (or a yuan/dollar relationship) could easily trigger a currency crisis encompassing both Japan and the US.

Yet, if everyone embraces the China thesis, the trigger will likely be somewhere else. For now, complacency still seems to rule, at least at the Fed. Of course, that requires one to believe the Fed believes what they are saying.

For now, former Dallas Fed Richard Fisher does seem believable, and he ignores China.

For details, and an incredible interview, please see Former Dallas Fed President Richard Fisher Goes to Squawk Box Confessional: "We Frontloaded a Tremendous Market Rally"; Transcript of Video.

Roll the Dice

A new set of dice get rolled every day. Place your bets.

Unlike most who are completely oblivious to the problems, and some who are aware of the problems and pretend to know when this all matters, I don't pretend to know when or where the next global crisis hits.

My bet is this will matter, in a reasonable timeframe, and gold will benefit.

That time could be now, or not. If someone tells you they know, trust me, they don't. If someone tells you the Fed has everything under control, laugh out loud.

Mike "Mish" Shedlock

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