Chart of the Day – China’s Minsky Moment? $FXI

by Enis April 15, 2013 2:34 pm • Commentary

I just saw the following re-tweet come across my stream thanks to Patrick Chovanec, an expert on the Chinese banking system:


For those not familiar, a Minsky Moment refers to a collapse of asset prices due to excessive debt (full Wikipedia here).  I’m not sure if China is in the midst of a Minsky moment, but putting that dire prediction aside, there have certainly been numerous signs of Chinese economic weakness over the past couple years.

After China’s massive stimulus program in 2009 and 2010, which saw fixed investment capacity increased at historically unprecedented levels, China has been feeling the after-effects of that investment binge.  At the end of the day, if the investment only resulted in empty cities as opposed to profitable projects, it’s unsustainable growth.

Many signs abound that it might be unsustainable.  The collapse in commodity prices is the most recent example, but Chinese equity prices have been sending signals of distress for years now.  Here is the 7 year chart of weekly chart of FXI to illustrate that point:

7 year weekly chart of FXI, Courtesy of Bloomberg
7 year weekly chart of FXI, Courtesy of Bloomberg

The Chinese market have never fully recovered from its 2008 lows, and is currently trading below where it finished the year in 2009.  For all the euphoria surrounding the new all-time highs in the SPX, the country that has been the largest driver of global growth for the past decade has been wilting for years now.

It’s the perfect illustration of the saying, “the stock market is not the economy.”  Chinese GDP has still been growing at around 8% per year, but profits have been squeezed to nothing, so Chinese companies are suffering under all the competitive capacity.  Only American companies in the materials sector have felt the full brunt of that excess capacity.  But global industrial excess capacity clearly exists, and could be a thorn in the side for global companies, not just their struggling Chinese peers, in the months to come.