Chinese Banks On Verge Of Collapse, Debt Unsustainable

REUTERS/China Daily

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Ryan Pickrell China/Asia Pacific Reporter
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Corporate debt in the world’s second largest economy is growing, increasing the likelihood of a banking crisis in the next few years, according to a new financial report.

China’s credit-to-GDP gap stands at 30.1 in the first quarter of 2016, the Bank for International Settlements (BIS) revealed in a report on Sunday. BIS, an international banking watchdog, suggests that figures over 10 are clear causes for concern, and that the credit-to-GDP gap measure is a key indicator of banking stress and financial health.

Rapid increases in the credit-to-GDP gap indicate excessive credit growth, putting China in danger of a severe banking crisis, explained Bloomberg News.

Given China’s current credit-to-GDP situation, BIS says a Chinese banking crisis could happen sometime in the next three years.

Since the global financial crisis, China has sought to curb downward trends and maintain growth through corporate borrowing and debt. Chinese debt hit 255 percent of its total GDP in 2015, and corporate borrowing rose 220 percent over a period of only two years, reported Business Insider.

China’s debt service ratio (DSR), which sits at 5.4 is also disconcerting. DSR can be explained as a measure of principal, leasing, and interest payments relative to income, and higher DSR figures point to higher default risks on loans. China has around $28 trillion in outstanding loans. The International Monetary Fund (IMF) asserts that Chinese loans worth $1.3 trillion are at risk, reports the BBC.

China’s debt could rise to 300 percent by 2020. Were it to become necessary for China to recapitalize its banks, China might need to inject at least $100 billion into its banks to stabilize them.

China’s numbers are alarming; however, China’s credit-to-GDP gap has been above 10 since 2009. So far, the world has yet to see a Chinese banking crisis.

Because the Chinese banking system is almost completely controlled by the government, some analysts argue that China can simply bail out its banking sector before a serious banking crisis occurs. A high domestic savings rate, mostly closed capital accounts, underdeveloped capital markets, and a lot of large borrowers could allow the credit cycle to continue unimpeded, explained Business Insider.

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Ryan Pickrell