China’s banking system is flashing a red warning signal

Ben Moshinsky/ International Business

The amount of debt used to fuel China’s economic growth has long been a worry to global investors.

Earlier this year, George Soros said that China’s debt expansion “eerily resembles what happened during the financial crisis in the US in 2007-08, which was similarly fuelled by credit growth.” And the warnings are getting more insistent.

The Bank for International Settlements (BIS) in Basel, which is a global organisation of central banks, released data showing just how dangerous China’s debt bubble is becoming.

The BIS said that China’s credit-to-GDP gap now stands at 30.1%, the highest for any country since data was collected in 1995.

The measure describes how fast credit has been growing in a country, and is an early warning signal for financial crises. It displays the difference between a country’s debt-to-GDP ratio and the long-term trend. The BIS said anything above 10% needs attention. On that basis, Canada is also entering into dangerous territory.

The BIS representative said: “Despite the slowdown in cross-border credit in late 2015 and early 2016, a number of countries still showed signs of strongly above-average domestic credit growth, which could sow the seeds for potential financial strains.

According to the BIS early warning indicators, which are intended to capture financial overheating and potential financial distress over medium-term horizons, credit growth continues to be unusually high relative to GDP in several Asian economies as well as in Canada.”

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