Minsky Moment and China

There should be a growing concern with the debt levels seen in the Chinese markets. See the latest post by Martin Wolf in the FT, although he believes a financial crisis is not likely. I would argue that it is less clear what will happen when you have a large high growth economy have a slowdown. In high growth environments, absolute lending can still be positive but the problem occurs when the rate of change slows. Debt growth is going to have to slow in China and this will mean a fall-out for some.

All forms of debt but especially corporate debt is growing at levels that far exceed the levels of growth in the Chinese economy. Much of these has gone into real estate and heavy industry which may not be positive present value project. There is a question whether all of the debt is being used for projects that are efficient.

While the recent growth number exceeded expectations this week, there has still been a slowdown in growth from the double digit levels over the last few years. It may not take much of a slowdown in growth to cause the breakneck lending to start to lead to failures. If this was Europe, there would be a real concern. The issue is whether the Chinese economy or more specifically the government is ready for this likely event of a debt restructuring across the economy. The first corporate default was this year which has place a scare into some, but that has not stopped significantly loan growth.

A controlled closed economy where capital cannot leave the system may provide some comfort, but the government may still have to enter the market and socialize the cost of poor corporate lending.