In fact, just with subprime, debt on the fringe in China is already shrinking on an absolute basis: Trust loans and bankers’ acceptances declined by 22 billion yuan and 241 billion yuan, respectively, in October.
In order to halt the deleveraging, the PBOC must do what the Fed did. Monetize government debt. Of course, the PBOC has printed more money than the Fed during the last decade, but curiously enough, it was monetizing U.S. Treasurys to keep the exchange rate stable.
This time, it will have to monetize Chinese central government debt to flood the market with liquidity and force people to buy houses and stocks again. Because if a Minsky Moment comes true and the credit system comes crashing down, the Chinese regime will have to seriously worry about unemployment again.
