China’s Central Bank Chief Warns of a ‘Minsky Moment’ Amid High Corporate Debt

China could potentially face a “Minsky Moment” amid high corporate debt and household lending, warns The People’s Bank of China Governor Zhou Xiaochuan.

“When there are too many pro-cyclical factors in an economy, cyclical fluctuations will be amplified,” Zhou said at an event on the sidelines of the 19th Communist Party Congress in Beijing. “If we’re 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.”

A “Minsky moment” is named after economist Hyman Minsky’s theory that long periods of market stability actually spur instability by encouraging investors to take on too much risk. This can lead to sharp, painful reversals when those positions are eventually unwound.

Zhou’s warning raised the specter that China could rein in credit expansion, which could slow growth in the world's second-largest economy. Analysts and global economic bodies such as the International Monetary Fund have warned that Beijing is stimulating credit too heavily in its aim to meet fixed growth targets.

China’s economy grew 6.8% from the previous year in the third quarter as expected, growth in new construction slowed and property sales dropped for the first time in more than two-and-half years in September.

In all, growth was still on track to beat the government’s target of around 6.5% for this year and 2016’s rate of 6.7%, which was a 26-year low.