AP Photo/Andy Wong
The transformation of China’s economy, both in terms of GDP growth rate and poverty reduction since it started its transition to the market system in the late 1970s, has arguably been the biggest macroeconomic event of the past half-century. The model that has characterized the country’s high output growth rates has followed in the footsteps of the Asian “tigers”: first, its high growth rates of capital accumulation, driven by high investment-output ratios; second, a marked outward orientation through export-led growth policies; and third, the pursuit of industrialization (in particular the production and export of manufacturing goods), a key ingredient for fast growth and development. By almost every metric, China has advanced from economic backwater to the world’s second-largest GDP (and by some measures, is now the largest economy).
But in spite of signs of renewed economic activity in March, the country’s debt build-up has provoked increasing concern amongst Beijing’s policy makers, as it points to an underlying long-term financial fragility, particularly if trade war pressures intensify. Just last October during the Communist Party Plenary, Zhou Xiaochuan, then head of the country’s central bank, warned of a “Minsky moment”:
“When there are too many pro-cyclical factors in an economy, cyclical fluctuations will be amplified. 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.”
To elaborate on Zhou’s statement, the economist Hyman Minsky described how once the debt “disease” goes metastatic, there will come a “Minsky moment” (a term originally coined by economist Paul McCulley) when euphoria gives way to concern and then to panic liquidation and credit revulsion. When that dynamic is in full flower, policy makers are powerless to avert it, no matter how much they want to bring the …read more