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​China Banking Stress Indicator Climbs to Record High

Jack Duffy | FlashRatings | Monday, September 19, 2016 2:13 PM EDT
Excessive credit growth in China has taken a key gauge of banking stress to three times the danger threshold, the Bank for International Settlements said. 

In a report released on Sunday, the Basel, Switzerland-based BIS said China’s credit gap, which measures the difference between the current debt-to-GDP ratio and its long-term term trend, rose to 30.1 in the first quarter. Readings above 10 signal an elevated risk of a banking crisis, the BIS said.  

China’s debt, at around 255% of GDP, is not high in absolute terms, but the speed at which the country has accumulated debt since the financial crises has raised concerns. In June, the International Monetary Fund said that addressing China’s corporate debt problem was “imperative to avoid serious problems down the road."

With outstanding debt of nearly $28 trillion, a banking crisis in China could easily send shockwaves around the world. But analysts say that with a high domestic savings rate and government ownership of banks, a banking crisis may be less likely than the BIS gauge suggests. China first surpassed the 10% level on the BIS measure in mid-2009 and has not experienced a crisis.

Chinese officials are well also aware of the dangers of rising debt. In May, the People’s Daily, the official Communist Party newspaper, published an interview with an unnamed “authoritative person” who warned that, if not managed well, high leverage could “trigger a systemic financial crisis.”

The BIS said its credit gap measure could not be applied “mechanistically” to all countries but warned it nevertheless “has been found to be a useful early warning indicator of financial crises.”