China is already in a credit crisis. We may not see a dramatic event or an official announcement about it. Rather it is going to be a long period of water torture. Last time China had a credit crisis, in 1999-2001, Zhu Rongji, Vice-premier announced the country’s banks were “technically bankrupt”. What followed was the creation of four “bad banks”, the asset management corporations (Cinda, etc). Massive recapitalisation of the banks led to high inflation of goods, services and asset prices. As a result, the bad banks turned into huge profit centres. This time, however, there is no political will to stage the same kind of “flooding”. But rather, Premier Li Keqiang said last week that the liquidity support would be in the form of “sprinkling”. The official restraint is hardly surprising, as the broad money supply M2 has risen 14-fold in the 18 years since the last “flooding”. The country is now choking on credit. And excessive credit is blamed by many as a key reason for the current crisis. Conclusion: for the first time, there is going to be a role for the private sector to play in the distressed-asset market.