China Must Choose the Form of the Destructor

Remember this story from a few months ago?

According to the latest official data, profits earned by Chinese manufacturers rose 2.6% from a year earlier in April, a turnaround from a drop of 0.4% in the previous month. Yet nearly all of that increase—97%—came from securities investment income, data from the National Bureau of Statistics show. Excluding the investment income, China’s industrial profits were up 0.09%.

Bloomberg: China Industrial Profits Fall Most Since 2011 as Growth Ebbs

Industrial profits tumbled 8.8 percent in August from a year earlier, with the biggest drops concentrated in producers of coal, oil and metals, the National Bureau of Statistics said Monday in Beijing. It was the biggest decline since the government began releasing monthly data in October 2011, according to data compiled by Bloomberg.

China’s stock-market plunge and currency devaluation are adding new challenges for the world’s second-largest economy as it struggles with excess capacity, sluggish investment and weaker manufacturing. The nation’s official factory gauge slumped to a three-year low last month, while Bloomberg’s monthly gross domestic product tracker remained below the government’s 7 percent goal in August with a reading of 6.64 percent.

There are many stories which say devaluing the yuan isn't a solution to China's problems. It isn't a solution, it is the inevitable result of runaway growth in money and credit. It is the "solution" in the same way that a ball plunging back to the Earth is the "solution" to throwing it into the air.

Except for genuine reform, any policy China chooses will have a major downside because of the massive levels of debt and malinvestment. Currency devaluation is likely to be part of the mix if only because it will prove to be impossible to stop.