HONG KONG (Reuters) - China’s central bank governor, Zhou Xiaochuan, warned on Thursday of the risks of a “Minsky moment,” citing relatively high corporate debt and saying household lending was rising too quickly.
On the sidelines of a key, twice-a-decade Communist Party Congress, Zhou pledged to fend off such risks.
But what did he mean?
The term, coined after American economist Hyman Minsky, refers to a sudden collapse of asset prices after a long period of growth, sparked by debt or currency pressures.
In the “The Financial Instability Hypothesis” (1992), Minsky outlined how risks from debt can build up during periods of growth until they become excessive in an economy that otherwise appears to be stable.
“In particular, over a protracted period of good times, capitalist economies tend to move from a financial structure dominated by hedge finance units to a structure in which there is large weight to units engaged in speculative and Ponzi finance.”
The term ‘Minsky moment’ is credited to U.S. economist Paul McCulley, who initially used it during the Russian financial crisis of 1998, around two years after Minsky died.
Minksy’s theories were again “rediscovered” during the global financial crisis of 2008.
In a 2009 speech, current U.S. Federal Reserve chief Janet Yellen, who was then San Francisco Fed president, spoke on the lessons that Minsky offered central bankers, saying “the dramatic events of the past year and a half are a classic case of the kind of systemic breakdown that he - and relatively few others - envisioned.”
“One of the critical features of Minsky’s world view is that borrowers, lenders, and regulators are lulled into complacency as asset prices rise.”
Hyman Minksy was born in Chicago in 1919. He earned a bachelor of science in mathematics from the University of Chicago, and master of public administration and a Ph.D. in economics from Harvard.
He taught at Carnegie Tech, Brown University and the University of California, Berkley. From 1965 to 1990 he was professor of economics at Washington University in St Louis. He was then a distinguished scholar at Levy Institute from 1990 until his death, aged 77, in 1996.
Minsky considered himself to be a Keynesian economist, but differed with mainstream economists on how to interpret the works of English economist John Maynard Keynes.
His theories on financial crises did not gain public prominence during his life, but in the aftermath of the global financial crisis they became widely cited.
“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.”
“We should focus on preventing a dramatic adjustment.”
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A lot, but accounting is opaque and relatively little is held by foreign investors who could suddenly flee for the exits.
The government says debt levels are generally under control and manageable, and notes the personal savings rate is high.
It has embarked on a campaign this year to contain risks from debt, but officials have been careful -- some critics say too careful -- not to tighten the screws too much and hit economic growth. Zhou has said there is no quick fix and it could take years to bring down high debt down to more manageable levels.
Corporate debt has climbed rapidly since China unveiled a massive stimulus program to cushion the economy during the global financial crisis. But much is held by state-run firms. The state also controls much of the banking system and can be heavily influential in financial markets, where the first hints of trouble often arise.
The International Monetary Fund 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.
The IMF also warned this year that China’s credit growth was on a “dangerous trajectory” and called for “decisive action”, while the Bank for International Settlements said in late 2016 that excessive debt growth was signaling a banking crisis in the next three years.
Global credit rating agencies S&P and Moody’s both downgraded China’s sovereign credit rating this year, citing worries about its rapid build-up in debt after years of credit-fueled stimulus used to meet official economic growth targets.
S&P said on Tuesday that China has taken only “baby” steps in deleveraging so far and bigger strides are needed. While credit growth is showing signs of slowing, S&P says it is expected to continue outpacing economic growth, leaving China with thinner financial buffers to deal with any crisis.
The Financial Instability Hypothesis, The Jerome Levy Economics Institute Working Paper No. 74.
Janet Yellen, “A Minsky Meltdown: Lessons for Central Bankers”
The Levy Institute
The Economist, July 30, 2016
Compiled by John Mair and Marius Zaharia; Editing by Kim Coghill