In 2007-2008, the United States had a Minsky Moment. It was the moment that asset prices, driven to unsustainable levels by cheap credit, collapse when the financial ponzi scheme runs out of road.
The term is named after the almost forgotten economist, Hyman Minsky.
Lately that term is being tossed around when referring to the globe's 2nd biggest economy.
Our analysis indicates that China’s economy has arrived at that unstable state where speculative and Ponzi finance appear to dominate. From a macroeconomic perspective, very few economies have ever created as much debt as China has in the past five years. China’s private sector debt has increased from 115% of GDP in 2007 to 193% at the end of 2013.3 (Display 2) That 80% increase over five years compares to the U.S.’s 26% in 2000-2005. In recent years, only Spain and Ireland have achieved debt growth greater than China’s.Every year, China is now adding $2.5 trillion of private sector debt to a $9.7 trillion GDP.The sheer volume of debt alone is unsustainable. You can't create 1/4 of a nation's GDP every year in debt without consequences.
The source of this Minsky Moment was in the days immediately following the 2008 crash. The central bank of China created immense amounts of easy credit (much more than in the United States) in their effort to prevent any slowdown of any amount in their economy. It worked, but it didn't produce sustained development. Most of it got sucked into real estate.
There is evidence that this debt growth has become excessive and non-productive. It now takes 4 renminbi (RMB) of debt to create 1 renminbi of GDP growth from a nearly 1:1 ratio in the early and mid-2000s.Most of those malinvestments have been funneled into speculative real estate, exceeding Japan in the late 80's and the United States in the mid 00's.
Nomura said the number of ghost towns has spread beyond the well-known disaster stories of Ordos and Wenzhou to at least eight other sites. Three developers have abandoned half-built projects in the 2.5m-strong city of Yingkou, on the Liaodong peninsular. They have fled the area, a pattern replicated in Jizhou and Tongchuan.This enormous Chinese real estate bubble has been pushed all over the world, as land-rich Chinese have used their speculative earnings to purchase houses in Canada, Hong Kong, and America, among other places.
Cash-strapped Chinese are scrambling to sell their luxury homes in Hong Kong, and some are knocking up to a fifth off the price for a quick sale, as a liquidity crunch looms on the mainland...The central bank of China has only barely started to cut back on loose credit, but the liquidity crunch is already hitting. That's a sign of far too much debt in the system.
"Some of the mainland sellers have liquidity issues - say, their companies in China have some difficulties - so they sold the houses to get cash,"..
Defaults or near-defaults have begun to occur with regularity over the past three months and are likely to pick up in quantity significantly over the next year. As it is becoming more clear that investors may not get all of their money back, interest rates on trust products, wealth management products (WMPs), corporate bonds, and bank loans have risen by roughly 200 basis points in the last year.If you think this doesn't affect you, consider that the financial markets have largely ignored what is going on in the Ukraine, but have watched the events in China very closely.
4:30 PM PT: Here's some videos of China's empty cities: