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September 20, 2016

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China facing possible ‘debt crisis’

CHINA’S banking sector could be facing an imminent “debt crisis,” a global central bank watchdog has warned, fueling fresh fears of a “blowout” in the world’s second-largest economy which could hit the global financial system.

The Bank for International Settlements (BIS) ­— dubbed the central bank of central banks — said a gauge of Chinese debt hit a record high in the first quarter of the year.

China’s credit-to-GDP gap reached 30.1 percent in the first quarter of 2016, its highest level ever and far above the 10 percent level thought to present a risk to a country’s banking system, the Switzerland-based bank said in a quarterly report released late Sunday. The gauge measures the difference between a country’s current credit-to-GDP ratio and its long-term trend.

The BIS gave China a red signal: a warning that it could face a “financial crisis” in the next three years.

China’s total debt hit 168.48 trillion yuan (US$25 trillion) at the end of last year, equivalent to 249 percent of national GDP, the China Academy of Social Sciences, a top government think tank, has estimated.

The warning comes as China tries to avoid a “hard landing” for the economy while transforming it from one based on state investment and exports to consumer-led growth.

Because China is a key driver of world growth, a crisis in its banking sector could have catastrophic implications around the world, with the global economy still struggling to recover from the 2008 financial crisis, analysts have warned.

China’s credit-to-GDP gap for the period was well above all other countries in the survey, which covered 43 economies including the United States, Greece and Britain.

China’s “Big Four” state-owned banks reported mounting bad loans in the first half of the year. An official with the banking regulator said lenders had written off more than US$300 billion of bad loans in the past three years.

Authorities have unveiled a set of policies intended to tackle the problem of souring loans, including debt-for-equity swaps. Analysts say the country’s vast foreign-exchange reserves and control over the banking system could help cushion the economy from financial crises.

“Cleaning up China’s debt problem will be expensive, but this process is likely to result in gradually slower economic growth rates, greater volatility, and a higher fiscal deficit/GDP ratio, not the dramatic hard landing or banking crisis” that many fear, said Andy Rothman of Matthews Asia in a note.

And because most potential bad Chinese debt is held by state-owned companies and banks, the government has control over the pace of recognizing and dealing with bad loans, he said.


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