China Up For Its Minsky Moment? ‘Bigger Than Expected’ Slowdown As Lending Falters, Say AnalystsRepresentative image. (VCG/VCG via Getty Images)

According to an analyst who has closely followed the economy, China, once the world’s economic superstar, could face a ‘bigger-than-expected’ slowdown by next year due to credit channels drying up, reported Business Standard (BS).

Charlene Chu, a senior partner at Autonomous Research in Hong Kong, said that credit activity to companies in the Chinese economy has ‘absolutely collapsed’ in 2018 and the repercussions of the same could start surfacing in 2019.

“Even though we have been technically in an easing mode since July, we have not seen this transmitting. We are not seeing any pickup in credit based on our measure and that’s not boding well for next year,” said Chu in an interview with Bloomberg, referring to the liberal injecting of liquidity into the economy by the Chinese government.

Central banks, across the world, decrease interest rates and give out loans to firms and individuals, to increase both consumption and investment. This provides a boost to the growth rate of the economy.

Economists across the world have repeatedly warned that China might be headed for a Minsky Moment. According to it, excessive speculation in any asset class (in this case, real estate) leads to instability in the market, leading to a bust in prices. During a boom period, investors take loans to buy assets at extremely high and unjustified prices. However, the boom period cannot exist forever, and soon, when the market corrects itself, prices start falling.

Now, investors who had borrowed money previously at high rates of interest are unable to pay back their loans because no one is willing to pay astronomical prices for junk assets. Thus, the bubble bursts and the recession starts.

Also Read: In A First, China May Cut Taxes To Boost Domestic Demand As Export-Led Growth Shows Signs Of Slowing

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