October 19, 2017 / 4:28 AM / 2 months ago

China central bank warns against 'Minsky Moment' due to excessive optimism

BEIJING (Reuters) - China will fend off risks from excessive optimism that could lead to a “Minsky Moment”, central bank governor Zhou Xiaochuan said on Thursday, adding that corporate debt levels are relatively high and household debt is rising too quickly.

A Minsky Moment is a sudden collapse of asset prices after a long period of growth, sparked by debt or currency pressures. The theory is named after economist Hyman Minsky.

Zhou’s warnings of potential risks facing the world’s second-largest economy contrast with the rosier views of most Chinese officials.

“If there are too many pro-cyclical factors in the economy, cyclical fluctuations are magnified and there is excessive optimism during the period, accumulating contradictions that could lead to the so-called Minsky Moment,” Zhou was speaking on the sidelines of China’s 19th Communist Party congress.

“We should focus on preventing a dramatic adjustment,” he said.

China will control risks from sudden adjustments to asset bubbles and will seriously deal with disguised debt of local government financing vehicles, Zhou said.

Still, China’s overall debt levels could decline as long as authorities keep a tight control on credit, he said.

Worries about a rapid build-up in China’s debt prompted S&P Global Ratings to cut China’s sovereign credit rating last month, following a cut by Moody’s in May.

China’s finance ministry said S&P’s downgrade was a “wrong decision”.

The International Monetary Fund IMF said in August it expected China’s total non-financial sector debt to rise to almost 300 percent of its gross domestic product (GDP) by 2022, up from 242 percent last year.

When asked whether he would retire this year or next, Zhou said: “Either way it’ll be soon.” The 69-year-old Zhou, the country’s longest-serving central bank chief, has spearheaded financial reforms and boosted the yuan’s global profile.

Sources told Reuters earlier that Zhou was likely to retire around the time of the annual session of parliament next March, and China’s top banking regulator Guo Shuqing and veteran banker Jiang Chaoliang are front runners to succeed Zhou.

YUAN BAND NOT KEY FOCUS

Zhou also said that the trading range of the yuan exchange rate was not a key issue at the moment, and that the width of the yuan’s current band rarely constrains supply and demand.

“Sometimes a widening of the exchange rate’s floating range is a signal that (China‘s) opening up will move forward. But this is not the key focus currently,” he said.

The central bank is considering a widening of the yuan’s trading band after the 19th Communist Party congress, Reuters reported in August, citing sources.

The central bank could widen the yuan trading range to allow it to rise or fall 3 percent against the dollar from the daily mid-point rate set by the central bank, up from the current 2 percent, according to the sources.

The foreign exchange market is currently stable, Pan Gongsheng, chief of the forex regulator, said on the sidelines of the congress, adding that supply and demand in the foreign exchange market was basically balanced.

Pan said on Wednesday that he expected yuan exchange rates to have a more stable foundation after the congress, and the central bank had “basically exited” from its regular yuan intervention.

Beijing burned through nearly $320 billion of reserves last year and the yuan still fell about 6.5 percent against the surging dollar, its biggest annual drop since 1994.

The yuan has gained nearly 5 percent so far this year.

Reporting by Min Zhang, John Ruwitch and Matthew Miller; Writing by Elias Glenn and Kevin Yao; Editing by Kim Coghill and Jacqueline Wong

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