China has about 200 million people in coastal areas who are still productively employed. Approximately one billion people in the interior scrape for bare existence, and nearly 100 million are squatting in coastal cities looking for work. Consequently, the Sino-State desperately needs high levels of economic growth. However, the Central Bank of China survey of 5,000 large industrial enterprises for the first quarter of identifies a severe deterioration in the economy. Combined profits for the 5,000 enterprises were negative.
Chinese banks are technically insolvent.
In particular, exports to Japan have fallen, all while the Japanese Yen devaluation causes further deflationary shock to China. China will most likely experience further increases in inventories during the second quarter of 1998. Moreover, sales will most probably decrease as operational losses mount. China can no longer afford to lose money producing goods that no one wants. However, banks are now insolvent - and are using available credit to finance rising inventories and business operating losses.