China's dilemma

This article provides some good food for thought about the timing of a yuan revaluation and the state of the Chinese economy. Some of the highlights.

Walker sees China hitting a wall, chiefly in the form of a labour shortage; not the much-publicised reluctance of inland Chinese recently to serve as factory fodder in the sweatshops of Guangdong, the industrial province bordering Hong Kong, but supply gaps in skilled workers and managers.
With about 1 million Taiwanese already employed on the mainland - about 10 per cent of the island's workforce and therefore probably close to the limit - newspapers in Hong Kong and South-East Asia are packed with ads for supervisory or technical jobs in China.

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Nor was the diet of low-yield government paper doing much for profitability in the scandal-prone Chinese banks, whose non-performing loans Roubini and Setser put at somewhere between 46 and 56 per cent of China's GDP.
Also last week, the ratings agency Standard & Poor's said recapitalisation of two of the big four state banks - the Industrial and Commercial Bank of China, and the Agricultural Bank of China - would require injections of between $US110 billion and $US190 billion.

Indeed, the weak position of the Chinese banks and their huge requirements for capital are cited by Xie as one more reason against early revaluation. As well as adding to bad debts by raising domestic real estate and other prices in relative terms, a higher yuan would require more US dollar investment to achieve sound capital adequacy.
Although disposal of bad debts via asset management corporations is lagging badly, Chinese financial authorities are still hoping to bring two large banks - the China Construction Bank, whose assets are mainly infrastructure loans to governments, and the Bank of Communications, which already has a 19.9 per cent "strategic" holding by HSBC - to international share offerings in coming months.

A good general rule in economics is that flexibility and transparency lead to stability. Along those line I guess I can see why China's policies have left it with few good options.