The governor of the People’s Bank of China (PBoC) gave an unprecedented warning last Thursday. Dr. Zhou Xiaochuan warned that the Chinese economy could face a ‘Minsky moment’ in the near future, if China allows tensions to build up in the financial system any further. This is the strongest signal of a possible policy change in China till to date.
Economists have been somewhat slow to see the threat of China on the global economy, the threat we have been warning since March. Within the last two months, however, the debate has changed a lot. S&P cut China’s credit rating and even the IMF warned about the risks of China. The problems of China can be summarized in two figures indicating that the economy of China is both over-levered and over-invested.