Are we going to import economic virus from China?

After we hoped for a crisis in China yesterday there is some cheering news today. The Chinese stock markets opened and closed for the entire day in less than an hour this morning when circuit breakers were activated by a 7% fall in market values. The Shanghai Composite fell by 7.32% while the Shenzhen Composite fell by 8.35%. Markets were spooked by a fall in the value of the yuan by 0.6% against the dollar. But that is not the whole story. The Peoples Bank of China has been fixing the yuan at lower rates everyday because it has devalued by 7.5% in offshore markets. China is our biggest enemy, regularly protecting Pakistani terrorist groups at the UN Security Council, so everything bad that happens to this nation of cockroach-eaters is good news for us, right? Unfortunately, as the yuan becomes weaker other currencies become stronger against it which makes exports of other countries more expensive than those of China. There is a danger of central banks in other Asian countries devaluing their currencies to preserve competitive advantage in the export market. That would be very bad news for India. Our exports have been falling for over a year and a strong rupee will not help. So why not devalue the rupee in line with other currencies? Because we pay for our imports, especially oil and gold, with dollars and a weaker rupee will push up costs for customers adding to retail inflation, which at 5.41% is higher than in other countries. The Purchasing Managers Index shows a contraction in manufacturing. Banks are sitting on $60 billion dollars of defaults on their loans and cannot lend unless they can clear up their books. Companies are loaded with debt. One-fifth of non-government, non-financial companies are said to be leveraged, which means their debt is twice that of market capitalisation and 15% of these companies are said to be highly leveraged. All these companies have net worth is less than zero. Higher profits would allow them to pay off the banks, which in turn, will have more cash to lend for new businesses. But profits can only grow if people buy more goods. There is a huge difference in spending pattern between the top 10% and the bottom 10%. While the bottom 10% spends 63% of income on necessities, such as food, the top 10% spends just 33% on necessities. The middle class has been hit hard by a combination of rising prices and ever increasing taxes, apparently to fund social schemes. Sly increases are called cess, which have been diverted for other expenses. Taxes are a straitjacket around the economy which has seen a fall in growth of the nominal GDP. That means lower tax collections. Some are suggesting that government spending should rise to compensate for private sector weakness. That would increase government borrowing and interest rate. A rock and a very hard place, what?