Trade War or Not, China Risks a ‘Minsky Moment’

Naked Capitalism has the article Trade War or Not, China Risks a ‘Minsky Moment’,

But in spite of signs of renewed economic activity in March, the country’s debt build-up has provoked increasing concern amongst Beijing’s policy makers, as it points to an underlying long-term financial fragility, particularly if trade war pressures intensify. Just last October during the Communist Party Plenary, Zhou Xiaochuan, then head of the country’s central bank, warned of a “Minsky moment“:

“When there are too many pro-cyclical factors in an economy, cyclical fluctuations will be amplified. 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.”

I just don’t get this debt worry for China. The economy as a whole holds massive reserves including in US dollars. Its massive trade surplus and massive holdings of reserves means that its growth is subsidized by the Chinese government. If the importing nations no longer want the Chinese subsidy, China can turn the subsidy around and use it in the domestic economy.

I have never understood how people can believe in MMT in one part of their brain, and then worry about Chinese debt in another part of their brain. I would very much appreciate someone making an explanation of how these two opposing ideas can be reconciled.

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