China CB Warns of Minsky Moment

China's central bank governor has warned the country's excessive debt and shadow banking could cause a financial crisis, despite Chinese banks being tightly state-controlled.

The People's Bank of China Governor Zhou Xiaochuan warned of a possible 'Minsky Moment' in financial markets resulting from excessive optimism, InvestmentWeek reported.

Speaking on the sidelines of the Communist Party gathering in Beijing, the Financial Times reports him saying: "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 is what we should particularly defend against."

A Minsky Moment, named after the late US economist Hyman Minsky, is when as a sudden major collapse of asset values after long periods of prosperity and upward markets leads to increased speculation by investors. The term was first used by PIMCO's Paul McCulley to describe the 1998 Russian financial crisis.

Zhou's comments are unnerving as it had previously been assumed the state-run bank would not be allowed to fail. However, speaking to China Daily, Zhou said asset speculation and property bubbles could pose a "systemic financial risk", while also warning on the high level of corporate debt.

Debt levels in China are estimated to reach as high as $7.6 trillion by the end of the year, fuelling concerns over the country's future.

Its debt has already seen a number of downgrades, with ratings agency Standard & Poor's recently cutting the country's credit rating from AA- to A+, while Moody's also lowered its rating by one notch to A1 from Aa3.

Consumer Loans Surge 30%

China’s outstanding household consumer loans surged nearly 30% by end September from a year earlier, data showed on Friday, a day after its central bank governor issued a strong warning about the risks of rapidly rising debt, Reuters reported.

A central bank report also showed a sharp jump of nearly 23% in property loans in the same period, suggesting authorities will be in no rush to remove tough cooling measures imposed over the past year to rein in soaring home prices.

The government and China bulls argue that its debt levels are generally manageable, given that levels of sovereign and household debt are much lower than in advanced economies, while savings rates are far higher.

The central bank report on Friday, however, suggested consumers are quickly catching up in the debt race, and much of the credit growth appears linked to the property market.

Outstanding household consumer loans in both yuan and foreign currencies totaled 30.2 trillion yuan ($4.56 trillion) by end September, jumping 29.1% from a year earlier. In the first nine months of this year, China’s banks issued 5.1 trillion yuan of new household consumer loans.

Analysts suspect funds from some of these consumer loans are flowing illicitly into the property market and stock market. China recently launched probes into consumer loans that are being misused for home purchases, warning they cannot be used to “fuel property bubbles”.

Despite intensifying property curbs and higher mortgage rates, Chinese banks issued 4.4 trillion yuan ($664.70 billion) of property loans in the first nine months of this year, more than the 4.32 trillion issued in the same period last year. The figures include individual mortgages and loans for property development.

As a result, outstanding yuan-denominated property loans rose 22.8% by end-September from a year earlier to 31.1 trillion yuan, the central bank said.

Outstanding individual mortgage loans rose 26.2% to 21.1 trillion yuan. The central bank didn’t disclose the value of new mortgages issued in the first three quarters.

China will release its latest home price data on Monday. Economists say surging house prices will also start to weigh on consumer demand as homeowners divert more of their income to servicing their mortgages.

While China’s per capita disposable income rose at the fastest pace in two years in the first nine months of this year, spending growth slowed to the weakest on record.