The head of the People’s Bank of China said that the Chinese economy could succumb to a “Minksy Moment” crash in asset prices if regulators fail to take greater pains to curb market excesses and debt.
Speaking at the sidelines of the 19th National Congress of the Chinese Communist Party on Thursday, Zhou Xiaochuan said that China was vulnerable to a collapse in asset prices given the country’s still untamed debt levels.
“If there are too many pro-cyclical factors in the economy, cyclical fluctuations are magnified and there is excessive optimism during the period, accumulating contradictions that could lead to the so-called Minsky Moment,” said Zhou. “We should focus on preventing a dramatic adjustment.”
Zhou said that China would prevent risk arising from abrupt changes to asset markets, as well seek to bring overall leverage level down and tackle the problem of debt hidden via local government financing platforms.
The IMF expects China’s total non-financial sector debt to expand to nearly 300% of GDP within he next five years, while the Institute of International of Finance claims that the country’s aggregate debt exceeded 300% of GDP in May of this year.
According to Zhou the trading range for the renminbi exchange rate is not a focal point at present, given that it does not hinder supply and demand dynamics.
“Sometimes a widening of the exchange rate’s floating range is a signal that opening up will move forward,” said Zhou. “But this is not the key focus currently.”
Sources said to Reuters in August that the yuan trading range could expand to 3% against the mid-point rate set by PBOC on a daily basis, from 2% at present.
On the topic of his retirement, 69 year-old Zhou said that “either way it’ll be soon.”
Zhou has served as China’s central bank governor for 15 years, and the prospect of his departure has triggered speculation on his potential replacements, with many sources pointing to China Banking Regulatory Commission head Guo Shuqing as the most likely candidate.