contagion or contagion
From what I understand, some significant percentage of loan principal was stolen through corruption. The stolen money has left (is leaving) the country to buy condos in Vancouver, London, etc. Normally this fleeing money would cause the currency to fall, but China is intervening and propping the currency up, using their foreign currency reserves to do it.
Once the reserves run out, if the stolen money continues to flee, it will cause the currency to move big time.
What is left behind is the massive pile of debt, with a lot fewer productive assets than you would hope to support that debt. Debt is therefore fundamentally unpayable; only choices are widespread default (currency wins, holders of cash win, but creditors lose, holders of real assets lose, deflationary crash ensues), or "swooping in" (currency loses, holders of cash lose, creditors get paid back in devalued RMB so they lose too, holders of gold and real assets stay win (they stay even), and no deflationary crash).
China won't be doing it because of some clever strategy. They're doing it because they don't want to pick choice #1, so choice #2 is what's left. And once they are unable to intervene to prop the currency up, that's when it will get interesting. Will money flee even faster? That I don't know. It will depend on the rate of swooping, I suppose, and that all-important confidence.
The semi-panic repaying of all the dollar debt by Chinese businesses is also exacerbating the fleeing-money problem. If I had a business in China and I expected the currency to move against me in the near future, I'd swap the (low interest rate) dollar debt for (higher interest rate) local currency debt as fast as I could.
As for exporting deflation, I'm not sure that's the right term. Deflation is a contraction of money and credit; I don't see that is what they would be exporting. They will be exporting lower prices via the exchange rate, that's for sure, and that will be a big problem for industry in other countries.
All the over-indebted nations have this same problem. Do you pay down the unpayable debt by widespread default and a deflationary crash, or by swooping in, printing money, and rescuing everything that might lead to contagion/debt deflationary crash?
Its less of a cliche, and more of "which door do you pick?"
(A third door is what Japan picked: pretend for 20 years that the debt is still A-OK. 2 lost decades was the result. They got deflation, just very, very slow deflation over 20 years; I worked there 20 years ago. Prices for, say, a meal are cheaper now than they were 20 years ago. Its a strange feeling.)