The Bank of England warned that the expansion of debt in the Chinese economy was a risk to financial stability.
The central bank’s Financial Policy Committee said that “credit growth in China continues to materially outpace GDP growth, and the level and growth of credit relative to GDP in China are very high by international standards.”
“Capital inflows into emerging market economies have resumed in recent months, loosening credit conditions and risking a further build-up of vulnerabilities, which could leave some countries at risk of a tightening in financial conditions,” the committee said in a statement following its meeting this week.
With many government and corporate bonds yielding close to zero interest, investors have sought higher yields in emerging market debt. The central bank is testing UK lenders on their ability to weather a bust in emerging markets and will reveal the results in November.
Here is a chart from Nomura that shows how much of their income China’s companies put towards servicing their debts. The rate has doubled since the 2008 financial crisis:
The Bank for International Settlements 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.
“While it is difficult to quantify ‘excessive credit’ precisely, the credit-to-GDP gap captures this notion in a simple way. Importantly from a policy perspective, large gaps have been found to be a reliable early warning indicator (EWI) of banking crises or severe distress,” BIS said.
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.
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