BIS: are we on the brink of a Chinese banking crisis?

In a world of zero interest rates and with a central banking system reliant on bond purchases that are keeping the markets very sensitive to shifts in monetary policy is leaving dark cloud over China. 

 As reported in The Telegraph, "China has failed to curb excesses in its credit system and faces mounting risks of a full-blown banking crisis, according to early warning indicators released by the world’s top financial watchdog."

The article supports such findings and points to the fact that a key gauge of credit vulnerability "is now three times over the danger threshold and has continued to deteriorate".

BIS, (The Bank for International Settlements) drew attention in its quarterly report to China’s "credit to GDP gap" that has reached 30.1 and highlighted that this is the highest to date.

"China’s total credit reached 255pc of GDP at the end of last year, a jump of 107 percentage points over eight years. This is an extremely high level for a developing economy and is still rising fast. Outstanding loans have reached $28 trillion, as much as the commercial banking systems of the US and Japan combined. The scale is enough to threaten a worldwide shock if China ever loses control."

“There has been a distinctly mixed feel to the recent rally – more stick than carrot, more push than pull,” said Claudio Borio, the BIS’s chief economist. “This explains the nagging question of whether market prices fully reflect the risks ahead.”

Bond yields in the major economies normally track the growth rate of nominal GDP, but they are now far lower. Roughly $10 trillion is trading at negative rates, and this has spread into corporate debt. This historical anomaly is underpinning richly-valued stock markets at time when profit growth has collapsed.