China’s banking sector could be facing an imminent debt crisis, a global central bank watchdog has warned, fuelling fresh fears of a blowout in the world’s second largest economy which could hit the global financial system.
The Bank for International Settlements (BIS) — dubbed the central bank of central banks — said a gauge of Chinese debt had hit a record high in the first quarter of the year.
China’s credit-to-GDP gap reached 30.1 per cent in the first quarter of 2016, its highest level ever and far above the 10 per cent level thought to present a risk to a country’s banking system, the Switzerland-based bank said in a quarterly report released late yesterday.
The gauge measures the difference between a country’s current credit-to-GDP ratio and its long-term trend.
The BIS gave China a red signal: a warning that it could face a financial crisis in the next three years.
China’s total debt hit 168.48 trillion yuan ($25 trillion) at the end of last year, equivalent to 249 per cent of national GDP, the China Academy of Social Sciences, a top government think tank, has estimated.
The warning comes as Beijing tries to avoid a “hard landing” for the economy while transforming it from one based on state investment and exports to consumer-led growth.
Analysts have warned that the ballooning borrowing risks sparking a financial crisis as bad loans and bond defaults increase.
Because China is a key driver of world growth, a crisis in its banking sector could have catastrophic implications around the world, with the global economy still struggling to recover from the 2008 financial crisis.
China’s credit-to-GDP gap for the period was well above all other countries in the survey, which covered 43 economies including the United States, Greece and the United Kingdom.
The BIS early-warning indicators are intended to capture “financial overheating and potential financial distress” in the medium term and to highlight the fact that rapid credit growth could “sow the seeds” for future crises, it said.
China’s “Big Four” state-owned banks reported mounting bad loans in the first half of the year. Earlier in the summer an official with the banking regulator said lenders had written off more than $300 billion of bad loans in the past three years.