On January 18, 2011 I had a great pleasure to give a lecture on China and its impact on global economy at Johns Hopkings University Applied Physics Lab.
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To answer the question the first gentleman asked regarding warning signs, I think the warning sign has already occurred, which is the Chinese government reining in growth in real estate sector through loan limitations. This is a classic Minsky moment. Minsky argues that when an economy experiences a long-period of growth, risk perception in the economy decreases and leverage build up, and high risk loans began to increase. Minsky believes that as growth increase faster and faster fueled by credit, the central bank will increase interest rate to control inflation. This tightening of credit will cause the most highly leveraged firms to bankrupt and liquidate. This causes asset prices to fall, and hits the lower tier of high leveraged firms and cascade downward. As this chain reaction continues, banks will become holders of assets themselves through owning collateral, thus creating a financial crisis. In China’s case, the Minsky moment, instead of increasing interest rate is loan tightening reacting to skyrocketing property value. In fact bankruptcy is spreading across China. Currently they are limited to mostly non-large cap firms. But due to the highly leveraged nature of almost all Chinese firms, we will soon see bankruptcy spread to large cap companies.
Vitaliy Katsenelson Contrarian Edge. All Rights Reserved.
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