China is at risk of a banking crisis, according to the report published by the Bank of International Settlements on Sunday.
The report included a study on the early signs of a banking crisis. It found China’s debt exceeding an amount that could end up in a system fallout. The debt was measured by a credit-to-GDP gap. The study also found out that the world’s second largest economy has a high level of debt servicing ratio, making its banking system more vulnerable.
The credit-to-GDP gap measures the difference between the percentage debt in an economy and the long term trade of that percentage. The higher number indicates that the debt grows at a pace that is unhealthy for the economy.
Meanwhile, debt servicing ratio pertains to the amount of money used to repay loans. The money comes from a proportion of income. The higher ratio suggests that borrowers have taken on too much debt than what their income can accommodate.
Additionally, the BIS report discovered that Canada and Hong Kong are both at risk of a banking crisis. The risks in these two economies were caused in part by climbing property prices.
The People’s Bank of China, the Bank of Canada, and the Hong Kong Monetary Authority did not issue a comment regarding the report.
However, the BIS stated that the report does not definitively mean that China, Canada, and Hong Kong are heading into a crisis.
“(The indicators) have been calibrated based on past experience, and cannot take account of broader institutional and economic changes that have taken place since previous crises,” said the BIS. The BIS is an umbrella body of central banks around the globe.
“For example, the much more active use of macroprudential measures should have strengthened the resilience of the financial system to a financial bust, even if it may not have prevented the build-up of the usual signs of vulnerabilities,” the Switzerland-based BIS stated.
The warning coming from the BIS is not the first international body to issue such claims to China.
In December, the International Monetary Fund identified three “major tensions” in China’s financial system that could undermine the country’s economy.
On the other hand, Chinese authorities had already acknowledged those risks. They have also taken action to slow down debt accumulation even before the IMF report was released. The country has accelerated those efforts in 2017 via strengthening regulatory oversight. They have also closed a number of loopholes in the economy.
Among the major steps taken was the creation of a “super financial regulator” to coordinate the oversight of banking, securities, and insurance sectors. The Chinese government has attempted to prohibit issuers of wealth management products from providing implicit guarantees to investors.
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