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. Additionally, current returns on investment have become very marginal, and possibly even negative, creating a disincentive to invest. Furthermore, maintenance of the present exchange rate will inevitably lead to a major contraction in fixed capital formation. If China's economic woes were not enough, it also suffers major social problems. At the current exchange rate China is about to implode.