Last week, the PBoC’s Zhou Xiaochuan’s did the unthinkable: he said “Minsky moment” -out loud, in front of people with working ears.
Worse, he said it on the anniversary of Black Monday. Here’s what we said about that:
Let’s just be clear: if you are the Governor of the central bank in charge of shepherding the economy that serves as the engine of global growth and trade, and if you are also in charge of defusing what many people believe is the financial equivalent of a nuclear bomb manifested as an elephantine shadow banking complex that no one understands, the very last – and I mean the very last – thing you want to do is say “Minsky Moment” in public.
But that’s exactly what the PBoC’s Zhou Xiaochuan did overnight in response to a question at an event on the sidelines of the 19th Communist Party Congress in Beijing. Here’s what he said:
- When there are too many pro-cyclical factors in an economy, cyclical fluctuations will be amplified. If we’re 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.
Yes, “that’s what we should particularly defend against.” Of course before we get around to “defending against” that, what we should definitely do first is “defend against” talking about it in public and for God’s sake, we should “defend against” talking about it in public and calling it a “Minsky moment.”
I mean give me a break.
You’re sitting on top of countless trillions of yuan in pyramided leverage embedded into a labyrinthine shadow banking complex characterized by an absurdly complex web of cross-holdings between banks and NBFIs that SocGen once described as “mind-boggling,” and you’re out here talking about “Minsky moments” on the side lines of the year’s most important political event on the anniversary of Black Monday?
That’s like if the guy with the wire cutters turned around right before he clipped the “red wire”, looked up at all of the people standing over him sweating bullets, and said something like: “The first thing we need to do is make sure I don’t cut the wrong one.”
On Monday, Mohamed El-Erian is out weighing in on just what a “Minsky moment” in China might look like and he thinks Zhou is worried about the wrong thing.
Excerpts from his latest for Bloomberg are below…
By Mohamed El-Erian
Although he was right to warn against policy complacency and general economic overconfidence, particularly in the context of a growth model that still relies too heavily on credit and debt, the Minsky threat of a financial crisis per se is lower than the risk of generalized downward pressures on economic growth should the policy effort falter.
The “Minsky Moment,” a term coined by my former colleague Paul McCulley at Pacific Investment Management Co., refers to a tipping point when a prolonged period of stability leads to unsettling financial volatility. It is the culmination of what the economist Hyman Minsky labeled a period of “Ponzi finance,” as risk-taking and economic activity are financed overwhelmingly by credit and higher leverage. It is fueled by booming debt encouraged by both lender and borrower overconfidence in continued financial stability. Coming at the end of the multistage Minsky cycle, it engenders dislocations, including a sudden destabilizing collapse in asset prices and markets.
Zhou is right to point to the growing risks associated with the rapid rise in total debt in China and, more generally, financial risk-taking by Chinese households, corporations and local governments. Indeed, some of the numbers are truly striking, including a near doubling in debt to gross domestic product in the last 10 years during a period of declining, albeit still high, economic growth.
As notable as growing indebtedness and financial risk-taking are in China, they do not automatically translate into a near-threat of a typical Minsky Moment for a simple reason: Forced deleveraging, the main driver of the traditional Minsky Moment, is unlikely in the Chinese context.
One way to illustrate this central point is to ask who would force the deleveraging that, accompanied by plummeting asset prices, would fuel indiscriminate panic sales, credit freezes, and cascading breakdown in payments, settlement and general financial confidence. The usual culprits in the developing world are jittery foreign investors, undercapitalized banks, overstretched nonbank financial actors, overvalued exchange rates and low international reserves.
The amount of foreign portfolio money invested in China is relatively low and difficult to move rapidly. Banks are subject to heavy regulation and moral suasion. The government has ample local and foreign exchange resources to use to stabilize the financial system. The exchange rate is not overvalued in a fundamental sense. And the authorities have also already shown a willingness and ability to manage capital outflows in an orderly fashion through the use of a range of instruments.
But this is not to say there are no risks. There are, and they relate mainly to the ongoing transition in the growth model.
Simply put, it takes China too many units of debt to generate a unit of growth. The longer this continues, the greater the doubts as to whether the incremental income generated in the future will prove sufficient to meet the ballooning debt service obligations.