Bank for International Settlements warning indicator for China banking stress climbs to record

China’s credit-to-gross domestic product ‘gap’ highest since 1995

18:58 September 18, 2016

Hong Kong: A warning indicator for banking stress rose to a record in China in the first quarter, underscoring risks to the nation and the world from a rapid build-up of Chinese corporate debt.

China’s credit-to-gross domestic product “gap” stood at 30.1 per cent, the highest for the nation in data stretching back to 1995, according to the Basel-based Bank for International Settlements. Readings above 10 per cent signal elevated risks of banking strains, according to the BIS, which released the latest data on Sunday.

The gap is the difference between the credit-to-GDP ratio and its long-term trend. A blowout in the number can signal that credit growth is excessive and a financial bust may be looming.

Two-thirds of all readings above 10 per cent have been followed by serious banking strains within the subsequent three years, according to the BIS. In China’s case, though, the warning indicator has mostly been above that threshold since mid-2009. In the first quarter, the nation’s gap exceeded the levels of 41 other nations and the euro area.

The data feed into debates about the outlook for the Chinese economy after a build-up in corporate leverage since the global financial crisis. The latest information was released by the BIS at the same time as its quarterly review.