Chinese Pulling Capital Out of China as Many Companies Cannot Even Repay Interest on Debt

This flow of capital will not disappear if capital controls are reintroduced. There will be holes and alternative assets such as gold.

ZeroHedge: Chinese Cash Flow Shocker: More Than Half Of Commodity Companies Can't Pay The Interest On Their Debt
The report's centerprice chart is impressive. It looks at the bond prospectuses of 780 companies and finds that there is about CNY5 trillion in total debt, mostly spread among Mining, Smelting & Material and Infrastructure companies, which belongs to companies that have a Interest/EBIT ratio > 100%, or as western credit analysts would write it, have an EBIT/Interest < 1.0x.

Here's the situation in 2007, then at the end of 2014 below. Companies above the line have interest costs that exceed operating profit.

Currency depreciation is coming because the currency has already been devalued by money and credit inflation. The exchange rate does not reflect reality because capital controls were blocking outflows, creating a supply/demand imbalance due to foreign demand for yuan. In reality, yuan is very cheap and will be priced far lower, which is now happening as capital controls are lifted.

About the only way out for China would be for the U.S. to launch QE4, since it would drive up commodity prices and devalue the yuan versus foreign currencies (since it remains tightly linked to the U.S. dollar). Also, past versions of QE have led to hot money inflows into China, something the country wouldn't mind at the moment.

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