Warning signs are flashing for China

Chinese debt levels have grown at an enormous pace in the seven years since the global financial crisis, adding to existing concerns over financial stability in China’s financial sector that flared earlier this year.

While those concerns have since subsided into the background, courtesy, in part, to another wave of central-bank monetary policy stimulus that saw markets recover since the depths seen in mid-February, the problem has not gone away. To many, it’s not a matter of whether these concerns will resurface but of when they will.

An analysis of China’s credit-to gross-domestic-product gap — the percentage by which the current ratio exceeds its long-term trend — based on analysis from the Bank of International Settlements that was released earlier this month, was made. At 30% at the end of the March quarter this year, the ratio was three times the 10% threshold the BIS deems to be an early warning signal that debt accumulation levels may be unsustainable.

While there are other nations above this so-called danger level, including Hong Kong, the pace of credit growth in China stands head-and-shoulders above the rest.

At a time when Chinese policymakers have turned to infrastructure and residential property construction — pillars of the ‘old’ China growth model — to help bolster economic growth, it does raise questions over whether the relative calm toward the Chinese economy in recent months will last.

According to Gerard Burg, senior Asia economist at NAB, the widening in China’s credit gap is nothing new and rather a continuation of the trend seen in recent years — a trend based on research from BIS is amplifying financial stability concerns to ever greater heights.

“While this result generated a considerable amount of press attention, the story is not new — China’s credit gap exceeded 10% for the first time in September 2009, and only briefly dipped below this mark during 2011 and early 2012, prior to fresh stimulus to underpin economic growth,” Burg wrote in a research note released last week.