What If China Can't Afford Imported Coal

What is the most likely explanation for why China is handicapping its economy after spending more than a decade bailing out various zombie industries. The first answer is the reform moment is actually here. All the attacks on corporations and wealthy CEOs over the past 18 months is part of a political consolidation ahead of letting the bottom drop out on the economy. Pop the credit bubble, ease the pain for the average Chinese citizen, but retain full political power by breaking the wealthy via recession and bankruptcies.

That doedsn't explain why they'd shut power on ordinary Chinese citizens though. We know the CCP doesn't care about climate change (nor should they, the best science argues against draconinan policies). The most likely explanation is central planning, which always fails in some new and spectacular way. The local officials have no idea how to apportion energy demand. They are now given electricity quotas, like the lending quotas in the prior decade, and once they hit the quota they shut the lights off. The power goes off at Mr. Zhang's apartment and Mr. Liu's factory.

What if that doesn't explain it though. What is the next most likely explanation? Given the existence of strict capital controls and recent total ban on cryptocurrency, plus everything we know about their reserve position and shortage of U.S. dollars, the current situation with Evergrade, the next most likely explanation is they can't afford it.

ZH: More Than Half Of China's Provinces Are Now 'Rationing' Electricity, Governors Demand More Coal Imports To Resolve Crisis

Reuters spoke with Han Jun, governor of the northeastern province of Jilin, who said new coal suppliers are needed from Russia, Mongolia, and Indonesia. He added the province would also need to acquire coal mining contracts in the neighboring region of Inner Mongolia to ensure adequate supply.

Jilin is one of the ten provinces that have been hit hard by the power crunch. The government has rationed power to energy-intensive heavy industries like steel, cement, and aluminum plants to solve the problem, but that has yet to work. Power plants are also facing a surge in thermal coal prices and are unwilling to pass on to consumers.

I have been discussing the potential for a major devaluation in the yuan for years. What I have repeated often is the following: the direction of the dollar is the key. Global macro forces are the key. If capital is flowing into China, if dollars are flowing into China, there is a near zero risk of currency devaluation in the short-term. The yuan will rally against the dollar. The same way that a highly indebted person or business has zero bankruptcy risk as long as their income exceeds their costs and interest payments, as long as their stock portfolio or whatever asset they have pledged against the debt is rising. The most bearish theory you can possibly imagine for the most incompetently run corporation will come to nothing so long as there is a positive trend. Enron, Lehman Brothers, Indy Mac were done in by the turn in the economy and markets. If the economy kept roaring along these past 20 years, Enron might be a $1 trillion company. Evergrande is going bankrupt now for a reason, one that we may learn more about in the coming months.

I spent countless hours studying charting as a way to filter down macro ideas. The chart of USDCNY looks like it has bottomed and will turn higher. That means pressure on China's reserves is rising. That means they are holding dollars more tightly. Evergrande is not repaying foreign borrowers. Power is being turned off as coal prices soar and the governors are asking for more coal imports...imports that cost foreign currency.

If I'm right, we're in for a steady stream of negative economic and financial shocks. If I'm wrong, we'll find out really soon because charts like USDCNY that are close to long-term support (or resistance in other cases) will move opposite to my expectation. I will adjust accordingly. I certainly could be wrong. Market turns are often clouded in uncertainty, a crisis is defined as "a crucial or decisive point or situation, especially a difficult or unstable situation involving an impending change. We often think of a crisis as negative, but really it is peak uncertainty. It can go either way. What drives the fear is that it could go the wrong way.