Tuomas Malinen

Q-Review 4/2017: The approaching perfect storm

The debt-stimulus of China and the pro-business policy of Donald Trump have given a strong lift to the global economy, but the imbalances behind the façade of this economic expansion continue to grow. These detrimental development during the past 9 years is currently converging towards a “perfect storm” likely to engulf the global economy within two years.

The global ‘Minsky moment’

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.

What will China do?

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.