The fundamental reason why money is tight is that Beijing is now starting to let the economy adjust.  Then Premier Wen Jiabao did not allow adjustments when the global downturn hit China in 2008.  His successor, the newly installed Li Keqiang, is starting this critical task.  "Their choice is not whether to tighten or not, but when to tighten," says Zhang Zhiwei of Nomura.  "The earlier they act, the lower the cost.  If they waited longer, there would be more bad loans to deal with."

The oft-quoted Zhang makes it sound as if China is starting early.  The new premier, to his credit, is starting in the first days of his tenure as premier, but Beijing should have begun tightening long before he was formally installed in March.

The primary constraint Premier Li faces is China's massive debt.  Total credit looks like it reached an incredible 198% of GDP by the end of last year.  By 2015, that number will hit 245%, according to Francis Cheung of leading brokerage CLSA Securities.  Fitch Ratings has just sounded an extraordinary warning on China's credit creation.

Li Keqiang has few options, and none of them are good.  True, he can avoid a day of reckoning by just continuing the lax monetary policy.  That course, however, aggravates the underlying debt problem by keeping money cheap and thereby permitting even more bad investment decisions.  China has long passed the point of diminishing returns when it comes to debt.  In 2007, Wen Jiabao created 83 cents of gross domestic product for every dollar of credit he authorized.  Today, Premier Li gets just 17 cents of output for every dollar.