After years of booming credit expansion, we’re now seeing slower economic growth in China and a rising number of domestic bond defaults.
This has prompted many to ask has China’s ‘Minsky moment’ arrived?
The phenomenon is named after economist Hyman Minsky who articulated that periods of speculation and credit growth inflate assets, only to end in crisis in tears.
Societe Generale’s Wei Yao was one of the first to write this up a year ago.
Morgan Stanley’s Cyril Moulle-Berteaux and Sergei Parmenov, argue that China is approaching its ‘Minsky moment’ (via Zerohedge).
“In recent weeks, a trip to the region and further research into China’s shadow banking system have convinced us that China is approaching its “Minsky Moment,” (Display 1) which increases the chances of a disorderly unwind of China’s excesses. The efficiency with which credit generates economic activity is already deteriorating, as more investments are made in non-productive projects and more debt is being used to repay old debts.”
But UBS economist Tao Wang argues that China’s ‘Minsky moment’ isn’t here. Wang points to a few reasons she thinks China pessimists are wrong.
- Pessimists are too focused on data at the start of the year — This data is distorted by the Lunar New Year holiday and should not be used to predict the rest of the year. In terms of exports, while the U.S. has had a severe winter, capital goods expenditures are expected to rise this year.
- Systemic risks in shadow banking are limited — A sharp deleveraging is unlikely because of “the lack of leverage in the sector, ample liquidity in the financial system, and the government’s control,” writes Wang. She thinks risk will be contained. (More on this later).
- Concerns about credit growth are overdone — Wang expects total social financing to rise 16% even as the government tries to tighten regulations on shadow banking. There will be enough credit growth to support economic activity
- Fears about the property sector are misplaced — Beijing will support construction with social housing and urbanization, and the slowdown will be “moderate.”
- Hot money inflows are unwinding — China’s foreign exchange reserves of $US3.8 trillion are enough to keep the exchange rate stable, while any liquidity drain can be offset by open market operations or cutting the reserve requirement ratio which currently sits at 20%.
China’s first domestic bond default and the recent collapse of a property developer have kicked off chatter about the systemic risk to China’s financial system.
Wang however argues that a loss of confidence in China’s shadow banking system would most likely see liquidity “flow back to the banking system (large banks especially), as the latter offer an implicit guarantee and China’s capital account is still largely closed.” So why doesn’t she expect a systematic crisis?
Wang expects the government will ask banks to back stop some of the trust and wealth management products and slowly restructure their debt, rather than”the rapid and market-forced write offs or a spiral of deleveraging that China ‘bears’ speak of.”
She also argues that banks still “have liquidity in the form of stable and cheap deposits trapped by a largely closed capital account.”
Wang expects China’s economy to grow 7.5% this year and thinks “fears of an imminent credit-crunch and hard landing will prove unfounded.”