China’s financial system is one step away from a full-blown crisis. Unless radical action is taken to stem contagion through the shadow banks and halt the contractionary slide in demand, China risks tipping into a classic liquidity trap.
Cai Fang, a rate-setter at the central bank, has called for a $US550 billion ($859 billion) blast of helicopter money – or high-powered quantitative easing injected into the veins of the economy – to stop a deflationary psychology taking hold as frightened households retrench.
