The search for the ‘Minsky Moment’ is bigger than China
You can tell China’s Zhou Xiaochuan, 69, is on the verge of retirement. No other powerbroker would have had the gall to suggest Beijing’s debt-fuelled boom might come to a nasty end at last week’s Communist Party Congress bash.
Not having to worry about job security frees officials to say what they really think. Such was the case with the People’s Bank of China (PBOC) governor talk of a “Minsky Moment”.
Zhou’s warning contrasted wildly with the Chinese President’s grand talk of a “new era” and an epochal “Xi Jinping thought” ideology.
Mao Zedong, move aside.
Deng Xiaoping, who’s that?
Zhou’s admonition is the real takeaway from last week’s conclave. Particularly because China is just one of three candidates in the running for the kind of sudden collapse in asset values of which American economist Hyman Minsky warned.
Add the US and Japan to the list of contenders.
China’s central bank head doesn’t have a fatalistic view of Asia’s biggest economy. Here’s how he put it: “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.”
Trouble is, Xi’s team is playing more offence than defence. The currency Xi is using to write himself into China’s constitution and, perhaps, even extend his presidency beyond 10 years is rapid growth. Any serious move to curb state-owned enterprises, recalibrate growth engines away from smokestacks to services and increase productivity will drive growth below 6% or even 5%. In that sense, good news on gross domestic product, or GDP, is bad news for China’s ability to avoid a nasty reckoning.
The pro-reform cadres in Beijing fear Zhou’s imminent retirement. He’s a student of Zhu Rongji, China’s most assertive change agent in generations who served as premier from 1998 to 2003.
At the PBOC, Zhou ended the peg to the dollar, scrapped caps on deposit rates and guided the yuan toward reserve status. Most importantly, he’s been a constant source of pressure on three different presidents since 2002 to raise China’s game.
Japan, meanwhile, faces a paradox unheard of for a Group of Seven, or G-7, economy. It has the biggest debt burden, the fastest-aging population, the lowest birthrates, persistent deflation and political paralysis that makes Washington seem functional. And yet, the Nikkei 225 stock average is going gangbusters.
Zhou’s Japanese counterpart, meanwhile, is warning about the state of regional banks. Bank of Japan governor Haruhiko Kuroda’s caution is a rare acknowledgement of the costs of holding short-term interest rates at or below zero for 16 years. What about a sudden surge in 10-year government bond rates, now at an impossibly low 0.07%?
The Nikkei’s surge to 20-year highs is one risk. The bigger one is a 15-year bond rally that’s long been in bubble territory. Japanese government bonds are the refuge of choice for banks, pension funds, insurance companies, the postal savings system, endowments, quasi-public institutions, retirees—everyone. A 2-to-3 percentage-points rise in yields would devastate the third biggest economy. And such a rout could be just one credit downgrade or a few ugly inflation reports away.
America harbours its own potential bubbles in stocks, government borrowing and White House folly. As the Dow Jones Industrial Average shoots skyward, analysts buzz about a “Black Monday” redux. That was on 19 October 1987, when the stock market plummeted 23%, the biggest one-day collapse in history.
Stocks are surging, after all, on little more than momentum. Huge tax cuts seem less and less likely as Trump’s approval numbers slide.
That raises questions about whether asset-price gains are racing ahead of growth trends.
It’s also a frightening wild card. In 2008, when Lehman Brothers blew up, the Fed tossed all it had at markets to restore confidence. Congress threw in $700 billion. Nine years ago, the biggest economy was clearly too big to fail. Next time, will it be too big to save?
The three biggest economies vying for the dubious honour of most vulnerable puts the global economy on tenuous footing.
Growth in emerging nations—including India’s—is picking up some of the slack. While Europe isn’t booming, the economic bloc is reasonably stable. But between the US, China and Japan, we’re talking roughly $36 trillion of output. Given the interconnectedness of the G-3, a Minsky Moment in any one of them could throw the other two giants off balance. Shock waves would spread from there.
Today, Zhou is ringing the alarm.
Tomorrow it could be Japan’s Kuroda, America’s Janet Yellen or India’s Urjit Patel.
Only time will tell if the forces boosting equities around the globe are for real, or a mania that ended badly from Shanghai to Tokyo to New York. Just don’t tell officials like Zhou that you weren’t warned.
William Pesek, based in Tokyo, is a former columnist for Barron’s and Bloomberg and author of Japanization: What the World Can Learn from Japan’s Lost Decades.
His Twitter handle is @williampesek
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