Risks of a Chinese banking crisis are mounting, according to a warning indicator from the banking industry’s global watchdog.
A key gauge of stress in the banking sector is now more than three times above the danger level, the Bank for International Settlements (BIS) said in its latest quarterly review.
China’s credit-to-GDP gap hit 30.1 in the first quarter of 2016, it said.
The BIS considers a credit-to-GDP gap of 10 to be a sign of potential danger.
A year ago the BIS quarterly review put the figure for China at 25.4.
The BIS calculates the gap by looking at borrowing in relation to the size of the economy, and comparing that with the long-term trend of that ratio.
When the two start to diverge, the BIS argues, a banking crisis could be on the way.
The BIS has a central position in global finance as it provides banking services to central banks and monitors the international flow of money and credit.
The health of China’s banking sector has long been a source of concern for financial markets.
Since the financial crisis of 2007-2008 there has been a boom in credit as the Chinese government has attempted to spur flagging growth.
But some of that lending has not been productive and the IMF estimates that loans worth $1.3 trillion are at risk of default.
However, as the Chinese banking system is largely owned or controlled by the government, analysts say the government would bail out the banking sector if necessary.
In its latest quarterly review, the BIS also said the markets has shown resilience following the UK’s vote to leave the European Union.
“The speed of the recovery took many by surprise, given the political and economic uncertainty that the vote had triggered,” said Claudio Borio, head of the Monetary and Economic Department at the BIS.
But he warned that, despite recent gains, global financial markets are in a sensitive state.
“There has been a distinctly mixed feel to the recent rally – more stick than carrot, more push than pull, more frustration than joy.
“This explains the nagging question of whether market prices fully reflect the risks ahead. Doubts about valuations seem to have taken hold in recent days. Only time will tell,” Mr Borio said.
Article source: http://www.bbc.co.uk/news/business-37403363