China is one of the major economies most vulnerable to a banking crisis according to a new report from the Bank for International Settlements.
The latest Quarterly Review from BIS says that a range of early-warning indicators such as household borrowing point to the strong possibility of a banking crisis in both China and Hong Kong.
“The indicators currently point to the build-up of risks in several economies,” wrote BIS analysts Inaki Aldasoro, Claudio Borio and Mathis Drehmann.
The report nonetheless notes that declines in China’s credit-to-GDP gap indicate that its ongoing deleveraging campaign has achieved some success.
China’s credit-to-GDP gap hit its lowest level in five years in the third quarter of 2017, when it posted a reading of 16.7%, as compared to a peak of 28.9% in March 2016.
The gap measures the difference between the credit-to-GDP ratio and its long-term trend, with a high reading pointing to the type of excessive credit growth that can pave the way for a financial calamity.
Analysts say the shrinking gap indicates that China’s financial system is becoming more efficient, which will help to contain leverage.
“This helps to slow the pace of the rose of the debt-to-GDP ratio, creating conditions for an eventual deleveraging of the economy,” said Ding Shuang, chief economist for Greater China and North Asia at Standard Chartered in Hong Kong, to Bloomberg.