It’s been almost two decades since economist Paul McCulley coined the phrase “Minsky Moment” to describe Russia’s financial crisis.
Since then, the work of economist Hyman Minsky has been regularly invoked to explain the bouts of market turmoil that hit Asia in the late 1980s and then the U.S. and ultimately the world in 2007.
In a nutshell, a “Minsky Moment” is a collapse in market values following the exhaustion of a credit expansion. Debt can only build up in times of economic growth for so long before a correction, goes the theory.
An American academic, Minsky died in 1996 before his work could become the subject of gloomy speeches by central bankers including Federal Reserve Chair Janet Yellen and Bank of England Governor Mark Carney. McCulley, who once worked for Pacific Investment Management Co., has explained how once the moment is reached, risk-taking shrivels “with all its consequences” for markets and the economy.
Now it’s the Chinese who are brushing up on their economic textbooks after People’s Bank of China Governor Zhou Xiaochuan warned against a sudden slide in optimism that could trigger a jolting collapse in asset prices.
“When there are too many pro-cyclical factors in an economy, cyclical fluctuations will be amplified,” Zhou said at an event on the sidelines of the 19th Communist Party Congress in Beijing. “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.”
That was a more explicit warning than the one made on Sunday in Washington when Zhou told Chinese companies they have taken on too much debt and there needs to be less financial leverage. The country’s total debt is already two and a half times the size of its economy.
It’s not, however, the first time that Minsky has been linked to China. Back in April 2016, two separate research reports cited the threat although they came to different conclusions.
A report that month by economist Jonathan Anderson published by Gavekal said it all in the headline: “China’s Impending Minsky Moment.” It outlined how a financial crisis and severe global downturn were likely by 2020.
About the same time, Mizuho Securities Asia Ltd. economists led by Shen Jianguang maintained sky-high savings rates, potential to develop its capital markets, low levels of foreign debt and record of solving past crises mean the nation can avoid a Minsky moment.Regardless of who is right, investors in China have been put on notice by Zhou that he’s worried.