Source: BMI, NBS, PBoC, Bloomberg bank s reserve pile remains sufficiently robust under our other four scenarios, a full-scale crisis could decimate its holdings amid a perfect storm of massive bank re-capitalisations, hot money and FDI outflows, speculative attacks against the yuan, and a surge in US dollar demand from corporates struggling to service their USD-denominated debts. It is under this scenario that China faces the greatest reckoning for the years of malinvestment stoked by its centrally-planned investment boom. ...It is under this scenario that China faces the greatest reckoning for the years of malinvestment stoked by its centrally-planned investment boom. The most likely series of events would be as follows (for further detail, see Yuan Crisis Risks Rising , De- cember -- ----): A slow-motion financial crisis takes hold, in which corporate defaults rise in response to increasing corporate losses, market interest rates rise sharply and the government is required to come to the rescue of the banking system. The PBoC would likely respond by slashing interest rates to near zero and engaging in direct bond purchases. ...Investment would gradually assume a smaller proportion of economy activity (versus its current level of ap- proximately --.- ) as the central government would continue to support infrastructure initiatives across the country.
...bates Structural Deficiencies (-- Probability): Under our second most likely scenario, Chinese policymakers hold firm to a reactive policy stance, eschewing proactive economic reform measures for short-term stability. This would entail continued strong support for industries which are beset with significant overcapacity, such as steel production, coal mining, shipbuild- ing and materials manufacturing (among others), with the goal of keeping labour markets stable. ...As such, it is of little use to attempt to pinpoint an exact trigger for such a crisis. In any case, such a crisis would be marked by a significant devaluation of the Chinese yuan (well beyond our core forecast for the currency to sell off to CNY-.----/ USD by the end of ----, and to CNY-.----/USD in ----), the imposition of much stricter capital controls, and an aggressive political crackdown both within the party as well as towards any public dissent from laid off workers or student activists. Notably, China s foreign exchange reserves are not nearly what they used to be relative to either money supply or the size of the overall economy. TSF surged to nearly --- of reserves by the end of ----, versus --- only a year prior.
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