China central bank chief warns of ‘Minsky moment’
Risk of excessive optimism as China reports strong headline GDP growth
by Gabriel Wildau in Beijing
Zhou Xiaochuan: 'If we are too optimistic when things go smoothly, tensions build up, which could lead to a sharp correction, what we call a Minsky Moment' © Reuters
China’s central bank governor has warned in unusually stark language of the risks from excessive debt and speculative investment, as he used the Communist party congress to caution that the country’s fast-growing economy faced a possible “Minsky moment”.
“When there are too many pro-cyclical factors in an economy, cyclical fluctuations will be amplified,” Zhou Xiaochuan, governor of the People’s Bank of China, said at a meeting on the sidelines of the Communist party gathering in Beijing. “If we are too optimistic when things go smoothly, tensions build up, which could lead to a sharp correction, what we call a ‘Minsky Moment’. That’s what we should particularly defend against.”
A Minsky moment, named after the late US economist Hyman Minsky, occurs when hidden risks in an economy suddenly manifest themselves and asset prices slump, leading to defaults.
Minsky believed that financial markets were inherently unstable because periods of prosperity lead to excess optimism and irresponsible debt-funded investment.
Hong Kong’s Hang Seng index closed down 1.9 per cent at 28,159.09 after Mr Zhou had spoken.
The warning from the central bank governor came as China reported economic growth of 6.8 per for the third quarter — above the government’s full-year target — even as economists warned that short-term growth has been achieved by relying on credit stimulus that creates longer-term financial risks.
Mr Zhou is expected to retire in the coming months after serving longer in his position than any predecessor. The PBoC is not independent from the ruling Communist party, but impending retirement appears to have emboldened Mr Zhou to speak candidly.
The PBoC governor said corporate debt in China was “very high” and that household debt, while still low, was rising quickly. “It’s not that we will deleverage the sector, but we need to monitor (household) leverage quality as it grows,” he said.
In similarly candid remarks last week, Mr Zhou urged his country to ease controls on cross-border capital movements and allow exchange-rate flexibility.
At the same meeting on Thursday, Guo Shuqing, chairman of the China Banking Regulatory Commission and a leading candidate to succeed Mr Zhou, touted his agency’s recent efforts to control shadow banking and other financial risks.
Xi Jinping, China’s president, has declared “financial security” a top priority this year, calling it an essential component of national security. Economists have warned that China’s extraordinary debt build-up since the 2008 financial crisis has created severe risks for the economy.
The International Monetary Fund in August called on China to rein in its “dangerous” levels of debt. Credit-rating agencies Moody’s and Standard & Poor’s both cited excessive debt growth as they issued downgrades of China’s sovereign ratings this year.
By some estimates, China’s overall debt as a share of economic output declined slightly this year, due to slower credit growth and higher inflation. But analysts say further financial tightening will be required to sustain deleveraging.
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