In starkly dramatic terms, the Bank of China’s Governor, Zhou Xiaochuan, raised the specter that the country could face a “Minsky Moment “. Named after the late economist, Hyman Minsky, the term refers to a sudden collapse of asset prices after a long period of growth, sparked by debt or currency pressures. (Many use this term to characterize the financial crisis of 2008, culminating in the collapse of Lehman Bros.)

The Governor was referring to the accelerating levels of corporate and household debt even during a time of rapid economic growth. We are all familiar with China’s extraordinary growth  over  nearly two decades. No doubt this performance provides a lot of optimism on the part of the private sector to take on increasing debt.

Are there beginning signs of an impending Minsky Moment in China?  Lets look at the main issues facing the government:

  • Private debt levels have risen sharply. According to IMF estimates Chinese bank assets are 310% of GDP in 2017, compared to 240% in 2012; non-financial debt is forecast to hit 300% of GDP by 2022, up from 242 % in 2016;

  • Public debt levels continue to grow.  Government debt equals 46% of GDP ( Figure 1). Granted in a command economy, public debt can be eliminated with a stroke of a pen, nonetheless these levels put pressure on the government to curtail  the growth in public debt.

  • Figure 1 Public Debt to GDP

                                

  • Commodity prices are falling. There has been a dramatic drop in the price of  key commodities, such nickel, copper and basic agricultural products ( Figure 2). Some of these drops are traced to over supply conditions and others to weakening demand. Either way, falling commodity prices are an early warning sign of  economic weakness. The growing weakness places greater emphasis on the need to curtail debt to prevent a financial crisis.

  • Print Friendly, PDF & Email