China central bank chief warns of asset bubbles, debt risk

People's Bank of China governor Zhou Xiaochuan said excessive optimism could lead to a sharp correction.
People's Bank of China governor Zhou Xiaochuan said excessive optimism could lead to a sharp correction.

China's central bank governor Zhou Xiaochuan has warned of asset bubbles and debt risk in the corporate and household sectors in the world's No. 2 economy.

"Excessive optimism during prosperity will lead to a build-up of tensions. This could lead to a sharp correction, the so-called Minsky Moment. We should particularly defend against that," he said in response to a question on the sidelines of the Chinese Communist Party's 19th national congress yesterday.

The "Minsky Moment" refers to a sudden collapse in asset prices after a prolonged period of growth due to increasing debt-fuelled speculation.

Mr Zhou singled out household debt as an area that China should start paying attention to. While it is "not that high" compared with global levels, it has been rapidly rising in the recent years, he said.

He also acknowledged that corporate debt is "very high", in part due to the lack of direct financing options and the inefficient use of capital by the firms.

But he was quick to point out that some of these corporate borrowings could in fact be local government debts that are parked under the name of the firms.

The regulators need to safeguard against local governments that use financing vehicles and other means to disguise debts or break quotas, he said during a meeting of leaders of financial institutions, which also included other top regulators.

International observers have warned repeatedly that China's mounting debt, mostly concentrated in state firms, could spark a financial crisis.

The International Monetary Fund expects China's non-financial sector debt to exceed 290 per cent of gross domestic product by 2022, compared with 235 per cent last year.

Mr Zhou, who has helmed the People's Bank of China, the country's central bank, since December 2002, revealed yesterday that he is likely to retire soon.

"Either way it will be soon," he said when asked by reporters whether he would retire this year or next, as he was leaving the room.

In another gathering of government officials yes-terday, former finance minister Lou Jiwei said China is no longer at risk of being stuck in the middle-income trap.

Mr Lou, who is now chairman of the National Council for Social Security Fund, is known for having proclaimed that China has more than a 50 per cent chance of stagnating at middle-income levels, unable to join the ranks of high-income countries in the next five to 10 years.

Asked about this, he said he had mentioned this more than two years ago as a warning, if nothing was done to address structural problems in the economy.

Thanks to the structural reforms put firmly in place in recent years, China is well on track to becoming a high-income nation, he added.

But noting that economic stagnation could also occur when a country achieves a high income, he said: "It is important to continue with reforms and opening up as we develop."

A version of this article appeared in the print edition of The Straits Times on October 20, 2017, with the headline 'China central bank chief warns of asset bubbles, debt risk'. Print Edition | Subscribe