Dr. Hyman Minsky

The financial press have gotten excited by comments out of the People’s Bank of China.  Zhou Xiaochuan, PBOC Governor, warned that household and corporate debt in China may be creeping too high in China, risking a “Minsky Moment” in which sectors of the economy face cash flow problems in servicing their debt (see Crisis, 2008 Financial).

The key quote (below) is a little less dramatic than journalists may like to pretend, but it’s refreshing to hear a Central Banker talking about risks that don’t prescribe more dovishness.

“If we are 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.” – Xiaochuan

There are some wonderfully candid pieces, and I highly recommend the FT’s coverage.  Xiaochuan goes on to indicate that the People’s Bank is concerned that corporate debt was already high and that household debt may be creeping up in the future.

“It’s not that we will deleverage the sector, but we need to monitor (household) leverage quality as it grows.” – Xiaochuan

These are real risks both in China and the US.  As the stock markets hit ever higher highs, the risks of complacency continue to increase.  As the governor says, it’s not time to delever any of these sectors, but it’s important to acknowledge that these risks are real and not simply focus on the “mystery” of low inflation.

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