No option: China has to deleverage

Dee Woo writes in the Business Insider that the Chinese government no longer has any policy options left, and it must start deleveraging.

Woo argues that the commercial and residential investment in housing has far out-paced demand. Historically, such high levels of construction end with a crisis. Domestic consumption could be a saviour but ". . . state enterprises and crony capitalists have heavily dominated the income distribution."

The People's Bank of China is injecting liquidity into the system. Last week it cut benchmark interest rates, the second time in less than a month, but the patient still hasn't responded.

Woo says the structual hurdles are too great and the more liquidity won't solve the problem.

The pyramid of debt/credit is cracking and will collapse since the conditions of underlying economic agents are deteriorating.There's no mount of monetary band aids that can alter that destiny.

And then the over-stretched banking system will implode. A full blown economic crisis will come in full force. The chain of reaction is clearly set in the motion now. The question is when we will reach that turning point. What PBOC has done is only adding fuel to the fire because it is unable to tackle the root causes of China's economic ills.

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