China Central Bank Warns of Collapse

China central bank governor, Zhou Xiaochuan, warned on Thursday of the risks of a “Minsky moment.”

He cited relatively high corporate debt in China and said that household lending was rising too quickly.

The term was coined after American economist Hyman Minsky.  He described a sudden collapse of asset prices following a long period of growth.  Furthermore, a collapse usually is sparked by debt or currency pressures.

Minsky published his hypothesis in the “The Financial Instability Hypothesis” (1992).  In it he 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.

HOW MUCH DEBT DOES THE COUNTRY HAVE?

A lot.  However, accounting in China is opaque.  Relatively little is held by foreign investors.  And they could suddenly flee for the exits.

Minksy’s theories were again “rediscovered” during the global financial crisis of 2008.  “One of the critical features of Minsky’s world view is that borrowers, lenders, and regulators are lulled into complacency as asset prices rise.”

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