How Do You Say “Minsky” in Mandarin? - By Christopher Pavese

Wikipedia defines a Minsky Moment as, “a sudden major collapse of asset values which is part of the credit cycle or business cycle. Such moments occur because long periods of prosperity and increasing value of investments lead to increasing speculation using borrowed money. The spiraling debt incurred in financing speculative investments leads to cash flow problems for investors. The cash generated by their assets no longer is sufficient to pay off the debt they took on to acquire them. Losses on such speculative assets prompt lenders to call in their loans. This is likely to lead to a collapse of asset values. Meanwhile, the over-indebted investors are forced to sell even their less-speculative positions to make good on their loans. This starts a major sell-off, leading to a sudden and precipitous collapse in market-clearing asset prices, a sharp drop in market liquidity, and a severe demand for cash.”

GDP grew faster than credit for years during China’s Economic Growth Miracle. But since the financial crisis, when policymakers opened the credit spigots wide open, “the bubble has become so big that sustaining it requires twice as much money as the real economy needs,” per Stephen Roach via Caixin. Roach claims that for every three yuan of monetary increase, two go toward sustaining the bubble. In the first quarter of this year for example, total credit growth in China accelerated to north of 20% – more than double the pace of GDP growth. This gap has been widening for more than a year, as illustrated in the graphic below.