Your arguments appears to directly contradict your skeptical position. If there are a lot of bad loans on the books of Chinese banks, then the inevitable write offs of these loans will cause massive asset deflation, same as it did in the US in 2008. The result will be currency appreciation, or at least the pressure to appreciate, given the currency peg presently in effect, and holding such currency is appears to be a great idea.
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Your arguments appears to directly contradict your skeptical position. If there are a lot of bad loans on the books of Chinese banks, then the inevitable write offs of these loans will cause massive asset deflation, same as it did in the US in 2008. The result will be currency appreciation, or at least the pressure to appreciate, given the currency peg presently in effect, and holding such currency is appears to be a great idea.