The Chief Strategist at Alpine Macro thumps the table to argue that a Minsky moment is impossible in China. He makes far too many conceptual mistakes.
It is not only the scale of debt but also the speed of debt accumulation that matters. Second, higher savings and higher debt/GDP ratios go together because higher savings mean lower interest rates, according to the author. But, there is also the concept of risk premium which should be demanded by creditors at higher levels of debt. That is missing. Of course, not just in China. In China, that is partly because of financial repression. Savers are thus deprived and, in the context of China, have far too few choices to register their protest.
Debt brings growth forward. It cannot go on for ever. That is the point that Mervyn King makes in his book, ‘The End of Alchemy’. That applies to China. Further, too much debt means much of the future growth goes to debt servicing and not productive investments. There is an opportunity loss here.
Too much debt will have created too much excess, idle and wasteful capacity. It is evident in China. That is why the incremental GDP/debt ratio keeps falling. Assets can and do drop in value especially if too much of them have been created whereas debt obligations are legal and fixed. Hence, to talk of the concept of Net Debt is not exactly relevant.
Finally, Japan has a net positive international investment position and that is not due to the size of its foreign exchange reserves. China’s net positive IIP turns negative once foreign exchange reserves are taken out of the equation. In such a situation, the size of the domestic debt raises the risk of a substantial exchange rate depreciation down the road, if capital flees.
The Minsky moment arose in the Western world in 2008 after twenty five years of debt-financed growth. Given its financial repression and other controls, it is possible that the Minsky moment is some time away in China. But, delay is not the same as denial.