Warning sign of China bank crisis | Business Insider

From Engen Tham, Reuters:

Excessive credit growth in China is signaling an increasing risk of a banking crisis in the next three years, a report from the Bank for International Settlements says.

The credit-to-gross-domestic-product gap, an early warning of financial overheating, hit 30.1 in China in the first quarter of this year, the financial watchdog said in a review of international banking and financial markets published Sunday.

Any level above 10 signals a crisis “occurs in any of the three years ahead,” the BIS said. China’s indicator is way above the second-highest level of 12.1 for Canada and the highest of the countries assessed by the BIS….

From the BIS:

The credit-to-GDP gap captures the build-up of excessive credit in a reduced-form fashion. It is defined as the difference between the credit-to-GDP ratio and its long-run trend, and it has been found to be a useful early warning indicator of financial crises.

In the BIS Table of credit-to-GDP gaps, Hong Kong was second highest at 18.1. Chile (15.7), Singapore (14.8), Thailand (14.5), Saudi Arabia (14.0) and Belgium (12.2) are higher than Canada (12.1). Australia (4.5), USA (-9.9) and UK (-27.0) are far lower. In fact, UK looks like a credit contraction.

Source: Credit-to-GDP warning sign of bank crisis China – Business Insider

2 thoughts on “Warning sign of China bank crisis | Business Insider

  1. That’s interesting, but according to the BIS table China’s credit-to-GDP has been above 10 since 2012 (as has Singapore’s) and Hong Kong since 2010 (and considerably higher than China’s). The banking crisis may be coming, but the 3-year rule doesn’t seem to work.

    • ColinTwiggs says:

      You’re right that China and HK have been above 10.0 for more than 3 years but I doubt that the rule doesn’t work. Just that 3 years is the mean or a certain confidence interval. It doesn’t mean that China/HK are immune and won’t follow a similar path to Ireland (59.2 in 2010 to -23.2 in 2014).

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