PBOC's Zhou Warns Of "Sudden, Complex, Hidden, Contagious, Hazardous" Risks In Global Markets

Tyler Durden's picture

Just two weeks after warning of the potential for an imminent 'Minsky Moment', Chinese central bank governor Zhou Xiaochuan has penned a lengthy article on The PBOC's website that warns ominously of latent risks accumulating, including some that are "hidden, complex, sudden, contagious and hazardous," even as the overall health of the financial system appears good.

The imminence of China's Minksy Moment is something we have discussed numerous times this year.

The three credit bubbles shown in the chart above are connected. Canada and Australia export raw materials to China and have been part of China’s excessive housing and infrastructure expansion over the last two decades. In turn, these countries have been significant recipients of capital inflows from Chinese real estate speculators that have contributed to Canadian and Australian housing bubbles. In all three countries, domestic credit-to-GDP expansion financed by banks has created asset bubbles in self-reinforcing but unsustainable fashion.

And then at the latest Communist Party Congress meeting in Beijing, the governor of the PBoC (People’s Bank of China) said the following;

“If we are too optimistic when things go smoothly, tensions build up, which could lead to a sharp correction, what we call a ‘Minsky moment’. That’s what we should particularly defend against.”

Yet, stock markets shrugged off his warning... while the Chinese yield curve has now been inverted for 10 straight days - the longest period of inversion ever...

Which appears to be why he wrote his most recent and most ominous warning yet... (as Bloomberg reports)

The nation should toughen regulation and let markets serve the real economy better, according to Zhou.


The government should also open up financial markets by relaxing capital controls and reducing restrictions on non-Chinese financial institutions that want to operate on the mainland, he wrote.


“High leverage is the ultimate origin of macro financial vulnerability," wrote Zhou, 69, who is widely expected to retire soon after a record 15-year tenure.


“In sectors of the real economy, this is reflected as excessive debt, and in the financial system, this is reflected as credit that has been expanding too quickly."

Zhou’s comments signal that policy makers remain committed to a campaign to reduce borrowing levels across the economy.

Concern that regulators may intensify the deleveraging drive after the twice-a-decade Communist Party Congress has helped push yields on 10-year government bonds to a three-year high.

Still, measures of credit continue to show expansion, with aggregate financing surging to a six-month high of 1.82 trillion yuan ($274 billion) in September. China’s corporate debt surged to 159 percent of the economy in 2016, compared with 104 percent 10 years ago, while overall borrowing climbed to 260 percent.

Bloomberg notes the key highlights from Zhou's note:

  • China’s financial system faces domestic and overseas pressures; structural imbalance is a serious problem and regulations are frequently violated
  • Some state-owned enterprises face severe debt risks, the problem of "zombie companies" is being solved slowly, and some local governments are adding leverage
  • Financial institutions are not competitive and pricing of risk is weak; the financial system cannot soothe herd behaviors, asset bubbles and risks by itself
  • Some high-risk activities are creating market bubbles under the cover of "financial innovation"
  • More companies have been defaulting on bonds, and issuance has been slowing; credit risks are impacting the public’s and even foreigners’ confidence in China’s financial health
  • Some Internet companies that claim to help people access finance are actually Ponzi schemes; and some regulators are too close to the firms and people they are supposed to oversee
  • China’s financial regulation lags behind international standards and focuses too much on fostering certain industries; there’s a lack of clarity in what central and regional government should be responsible for, so some activities are not well regulated
  • China should increase direct financing as well as expand the bond market; reduce intervention in the equity market and reform the initial public offering system; pursue yuan internationalization and capital account convertibility
  • China should let the market play a decisive role in the allocation of financial resources, and reduce the distortion effect of any intervention
  • China should improve coordination among financial regulators

Which all sounds very ominous and very positive in ending this facade..but just like the promises/threats ofprevious deleveragings - at the first sign of market jitters, the bankers will fold. As Kyle Bass recently concluded...

"...it’s the biggest bubble we have ever seen in the history of financial markets. $40 trillion of assets in a system with $2 trillion in equity."

Aside from China's credit bubble, the simmering conflict in North Korea and tensions between the US and China related to the latter's insistence on building in the Spratly Islands also threaten China's economy, as well as global risk assets.

“We’re now in a bubble of epic proportions for Chinese credit...everything seems to be bubbling to the top and reaching a boiling point almost concurrently."

To be sure, there are a lot of powerful interests around the world that would suffer if China’s economy collapsed. But despite this, because he believes in the position, Bass is going to stay on his side of the trade – even as other longtime China bears like Mark Hart announced this week that he was abandoning a seven-year long bet on a massive yuan devaluation.

“People so want for everything to be okay. Nobody in their right mind wants us to be right because if I’m right were going to see a global growth slowdown you think about the concentric circles of how it affects each participant.


The economy may really slow down and we might have additional problems…so I’m going to keep investing the way I am and hope it all works out.”

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Truther's picture

"Minsky Moment". Sounds Minsky to me.

NoDebt's picture

The Chi-coms have been reading too much ZH.  It'll be fine.  You'll see.


old naughty's picture

Zhou speaks,

please listen !




You never know, he might be the next IMF Head.

JibjeResearch's picture

NO way, Why the hell China restricts capital outflow?

loebster's picture

When Global Markets really do explode, it'll be KARMA for-


in which the whole world took part.

mpnut's picture

Now that is a Mouthful..

guru69's picture

You are truly messed up on your false sky god.  You'll likely be relegated to be kindling in hell.  Insignificant misled flea

Arnold's picture

I pulled up Zhou on the wiki.
He did not attend Princeton, Harvard or Yale.
That's a plus in credibility column for him.
Doesn't seem to have worked for Goldman either.


BobEore's picture

but but ... wait!

China... isn't that the nation what has all that 'GOLD' hidden away, much much more than they admit too?

And doesn't that mean... in the lexicon of the lemming/loon caste who populate these pages ...

that the Sinos are immune to the risk of the kind of systemic crash n burn which those silly westerners... most particularly that nation which has way way less "GOLD" hidden away than it pretends to?

My head spins trying to keep up with the competing, contradictory messages which come from PSYOP CENTRAL here daily ...

China Rules... China Fools... End of the Road for "central planners"... Beginning of the "Silky" Road to global ascendancy - for 'central planners'!!! Whew! No wonder Silly Zheeples are perma-confused.

Maybe... jus maybe...

ITS ALL BULLSHIT. ALL THE TIME. Of the kind which $powers (and their media minions of course!)disseminate in order to continue quietly with their plans for global domination.

No point in trying to think thru the 'logic' behind all this story-spinning. Best to just CHEER ALONG!
tHAt's actually what yur here for - and all yur here for- get it yet?

Mustafa Kemal's picture

"tHAt's actually what yur here for - and all yur here for- get it yet?"

BobEore, you had me until there. But no, they may think that, but I have a different idea

Yen Cross's picture

 Rehypothecated sand castles and copper much?

Late onset ADHD's picture

between their bond yields and the 5 year spread, there is concern...

hedge and trade accordingly... if you dare...

Schmuck Raker's picture

So VIX 6, BTC 20k by the end of the week?

Late onset ADHD's picture

and castles made of sand... fall in the sea...


Solio's picture


Protect all children!!!

Hillarys Server's picture

Will this hidden, complex, sudden, contagious and hazardous risk make my humble roll of silver dimes go up as has been promised me for the last ten years?

It would be an extra treat if every one of my relatives who invested in the equity market and who stared into my eyes the other day and said to me "Are you jealous...?" lose everything amid wailing and gnashing of teeth.

ds's picture

At best on Japan's road to lost decades ahead as they dismantle their Ponzi. Their failing State Capitalism Model has to be propped by exterme nationalism. The poplulace is as in almost all textbook cases of failed economies expected to share the debt burden disproportionately. The populace is further diverted to sacrifice for grandiose vision (OBOR, South China Sea forays, etc). Cheer them on the latter ambitions anchored on sand.

Are you expecting that agnostic global markets owe them a living and will not loot failing State Capitalism in China and elsewhere ? Complaining that China has stolen jobs, etc do not help for you to reverse your fortunes. Even their internal smart monies know where to fly.


buzzsaw99's picture

never bet against chinese intervention.  no matter what they say or how strenuously they say it.  just don't.

earleflorida's picture

canada and australia etal., export raw materials to china--- and china buys said countries real estate (inflated / deflated non-factor?) hmmm!

sounds like the business model great britain used to crush the ussa economy from 1864- 1898?

Forign Direct Investment *(FDI) 1997- nov/2017      *equities excluded

https://tradingeconomics.com/china/foreign-direct-investment        ** charts say all with export data & API access /countries

guess whose buying china? you'd be surprised.

Ps. Important :: exactly 90 days after '911' Bush #43 brought China entrance into the WTO, with 'most favored status  (keep this always in the back of your mind regarding the 'PRC' and Communism! = High Yield Socialism = inverted Imperial Capitalism

Baron von Bud's picture

Lots of Swiss and South Korean investment into China. Swiss is huge - big pass-thru funds or laundering.

Dragon HAwk's picture

Maybe they got both feet on the neck of a huge snake and are about to jump off and run for it.

Yen Cross's picture

 Fuck China!  I've stated multiple times over the last 2-3 years, that I'd love a SWIFT alternative.

 China is bankrupt, and demand isn't growing. [Welcome to stragflation PBoC]

slipreedip's picture

China isnt bankrupt.

They still have all those US bonds they can sell.....

Or like America has done to so many countries,

just gone in and taken stuff

57-71's picture

So China crashes.

What does that due to North American and European markets?

Yen Cross's picture

 The fed would be whistling " Dixie" outa their assholes with those PBoC bond projections.

Masher1's picture

I think i will pop in the Fight Club DVD, Seems apropos.

slipreedip's picture

Americas corruption and manipulation of capitalism and global financial markets if coming back to haunt it.

Anything America can invent,

the chinese can do better, faster,  more efficiently and cheaply.


Anteater's picture

The Trump Administration thinks you're full of horse picket,

and just released this stultifying communique on 'The Quad': 

"The U.S. is now entrenching new language

for America's role in the Asia. It is now

officially the Indo-Pacific, not the Asia-

Pacific. That attempts to bring India

permanently into the U.S. web of alliances

and partnerships in the region. And it is

the precursor to the new partnership —

"the quad" — which will bring together the

U.S., Japan, India and Australia. The first

meeting will be soon, to bring 1,000,000

H-3B visa Indian workers to the US and an

increase above 150,000 H-1B high-tech, 

to keep America strong and growing!"

Money_for_Nothing's picture

Go China go?

If China could only unleash individual initiative and create an open market.

Kurpak's picture

....even as the overall health of the financial system appears good.


peterk's picture

if china rates are moving up, its only a matter of time till the Japanese rates move up.

thats the key as chiona is where CAPITAL is being utilised on a global  basis

After China rates move up

Japanese rates move, then

US rates then

Euro rates

then Eurodollar  goes up and takes all the world with it  including yellen,

Thats the Order for chaos to occur


Money_for_Nothing's picture

Japanese rates aren't moving up. To be a net exporter they have to buy foreign financial assets (eg not real stuff). Japan does not want to attract foreign investment.

China rates don't matter cause they have to keep SOE's propped-up. Most of Chinese debt is funny money that will have to be written off behind the scenes out-of-sight.

US has to inflate the Dollar. Either that or surrender to the world and become the 2020 equivalent of 1900 China.

Eurodollar will be collateral damage. Borders have to be controlled and anti-dumping measures have to be in place.

Money_for_Nothing's picture

Japanese rates aren't moving up. To be a net exporter they have to buy foreign financial assets (eg not real stuff). Japan does not want to attract foreign investment.

China rates don't matter cause they have to keep SOE's propped-up. Most of Chinese debt is funny money that will have to be written off behind the scenes out-of-sight.

US has to inflate the Dollar. Either that or surrender to the world and become the 2020 equivalent of 1900 China.

Eurodollar will be collateral damage. Borders have to be controlled and anti-dumping measures have to be in place.

Money_for_Nothing's picture

What happened to the all knowing, all seeing, Chinese Central Committee?
Maybe they could invite former President Carter or former President Obama over to show them how it is done.

Wear sweaters and dire 55 MPH?

Give a speech where you say, "Some people say ..." and drone on for an hour?

A. Boaty's picture

Overthrow bourgeois instability! Establish a stable stock market!

robertocarlos's picture

Worrying about your money will kill you.

roadhazard's picture

This is going to put a crimp in China being th next world power and the Yuan being the new Petro dollah.


So solly mista China man.