Bloomberg News

Minsky Moment Alarm Sounded in China: Cutting Research (Correct)

June 21, 2013

(Corrects debt service ratio in fifth paragraph. Sign up to receive Cutting Research stories: SALT CUTTING)

China may be approaching a “Minsky moment” -- a sudden fall in asset values bloated by credit.

Credit growth in the world’s most populous country has outstripped economic expansion for five quarters, raising the question of where the money has gone, Societe Generale SA (GLE) economist Yao Wei wrote in two recent reports. In the first quarter, for example, bank loans, shadow banking credit and corporate bonds together accelerated more than 20 percent year-over-year, while gross domestic product grew less than half that much. The gap has been widening since early 2012.

Yao says the answer to where the money is going is a growing “debt snowball” which doesn’t contribute to economic activity. The result is both companies and the public sector face burgeoning interest expenses.

This fits with the theory first put forward by economist Hyman Minsky of Washington University in St. Louis. His financial instability hypothesis showed how markets create waves of credit expansion and asset inflation, followed by periods of contraction and deflation.

Using methodology from the Bank for International Settlements, Yao estimated a debt burden of non-financial companies and local government financing vehicles of about 150 percent of GDP at the end of 2012. Assuming an average interest rate of 6.3 percent, Yao estimates a “shockingly high” debt service ratio of 38.6 percent of GDP.

Similar ratios were evident in countries as they neared financial and economic crises, including the U.S. and the U.K. in 2009, South Korea in 1997 and Finland in the early 1990s.

“The logical conclusion has to be that a non-negligible share of the corporate sector is not able to repay either principal or interest, which qualifies as Ponzi financing in a Minsky framework,” said Yao. “This is one more data point in China that evokes the troubling thought of a hard landing.”

At the very least, Yao expects “the inevitable increase” in non-performing loans and the need to deleverage to slow Chinese growth over the coming years. She estimates expansion of 7.6 percent this year and 7.2 percent in 2014.

Colleague Albert Edwards, a London-based global strategist, said in a June 12 report that Australia would be hard hit by such a weakening. “If China really is, as we believe, about to have its ‘Minsky moment,’ there is no shadow of doubt in my mind that Australia will wind up in a deep, deep recession,” he said.

* * *

Investors are betting Federal Reserve Chairman Ben S. Bernanke walks the talk.

A June 12 study by Deutsche Bank AG economists led by Peter Hooper found financial markets tend to anticipate a bias toward easing monetary policy when Bernanke holds one of his four-times-a-year press conferences after meetings of the Federal Open Market Committee. He last spoke to reporters June 19.

The Standard & Poor’s 500 Index (SPX), for example, tends to rise by about 1 percent more than average in the five days prior to an FOMC gathering with a press conference. It tends to fall by a similar magnitude ahead of meetings without a media address.

Still, the economists say that since the practice of holding press conferences started in April 2011, there have been almost as many important policy announcements made at FOMC meetings without press meetings afterward as there have been at those with them.

Co-author Torsten Slok said this week’s press conference may also have been a “game changer” in that Bernanke used it to signal the Fed is prepared to begin phasing out its asset-buying program later this year. “The market had come to expect all communications to over-deliver in terms of dovishness and now that’s changed,” said Slok.

* * *

Certain measures of global liquidity are a better early warning signal of booms and busts in housing and equity prices than gauges that include local data.

That’s the conclusion of a study from the Dutch central bank, which monitored 20 advanced economies between 1970 and 2010. It found that looking at the liquidity of just the five biggest economies offered better clues than a broader group of 26 countries or currency blocs, said author Beata Bierut.

For example, tracking so-called narrow money -- which measures the amount of currency in circulation, deposits and other liquid assets held by central banks -- provided tips for booms in house prices. Keeping an eye on private credit growth helped spot equity booms.

* * *

Volunteering may be the key to landing a job, according to the Washington-based Center for Economic and Policy Research.

Pooling three years of data, its report found a positive relationship between the probability of employment and volunteering for more than 20 hours per year.

For example, the employment rate for non-working people who volunteered between 20 and 49 hours per year was 57 percent higher than those that didn’t, the report found.

* * *

The U.S. may have little reason to worry that an aging population will make its economy more unproductive.

Research funded by the Social Security Administration and published this month by the Center for Retirement Research at Boston College found over the past 25 years that age has been no threat to productivity.

Indeed, improved education among those over 60 and delays in retirement among the better-schooled have tended to boost the earnings of older workers relative to younger ones, said Gary Burtless. He is a senior fellow at the Brookings Institution, which analyzes national public policy in Washington.

For example, on one measure of individual worker productivity -- hourly wages -- male employees aged between 60 and 74 earned an average 22 percent more in 2011 than workers between 25 and 59.

The expectation that older workers reduce productivity may be fueled by the perception the aged are less healthy, educated and up to date in their knowledge than the young, said Burtless, a former economist at the U.S. Department of Labor.

* * *

If you’re a pension-age American, stay away from the grandchildren if you want to be happy.

Elderly Americans who live with people under the age of 18 enjoy their lives less than those who don’t. They also suffer more anger and stress, according to Angus Deaton of Princeton University and Arthur A. Stone of Stony Brook University.

While the negativity may relate to being forced to share habitats, such as if the person is ill, controls still show the elderly who live with children do worse, Deaton and Stone said in a paper published last week by the National Bureau of Economic Research in Cambridge, Massachusetts.

In countries where fertility rates are higher, Deaton and Stone found elders do not appear to have lower life evaluations because such living arrangements are more usual.

“The misery of the elderly living with children is one of the prices of the demographic transition,” the authors wrote in the paper titled “Grandpa and the Snapper.’”

To contact the reporter on this story: Simon Kennedy in London at skennedy4@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net


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