Warnings as China’s credit-to-GDP gap reaches 30.1 percent

Beijing, China | AFP | 

A key gauge of China’s debt has reached its highest level on record, setting off alarm bells of imminent risk to the banking system, a Swiss banking watchdog reported.

China’s credit-to-GDP gap reached 30.1 percent in the first quarter of 2016, its highest level ever and far above the 10 percent level associated with banking risks, the Bank for International Settlements (BIS) said in a quarterly report released late Sunday.

It gave China a red signal, a level it said was intended to indicate the possibility of a financial crisis in the three years ahead.

The world’s second-largest economy is grappling with a tough economic transition, as Beijing seeks to boost sluggish growth with an infusion of cheap credit.

But analysts have warned that a debt-fuelled rebound might be short-lived, and that ballooning borrowings risk sparking a financial crisis as bad loans and bond defaults increase.

The BIS put China’s debt level for the period above all countries in the survey, which covered 41 nations 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, it said, and to highlight that rapid credit growth could “sow the seeds” for future crises.

China’s total debt hit 168.48 trillion yuan ($25 trillion) at the end of last year, equivalent to 249 percent of national GDP, the China Academy of Social Sciences, a top government think tank, has estimated.

Last month all of China’s “Big Four” state-owned banks reported mounting bad loans in the first half of the year, and earlier in the summer an official with China’s banking regulator said that banks had written off more than $300 billion of bad loans in the past three years.

But Chinese authorities have unveiled a set of policies intended to tackle the problem of souring loans, including debt-for-equity swaps, and analysts say China’s vast foreign-exchange reserves and control over the banking system could help cushion the economy from financial crises.