Excessive credit growth in China is signalling an increasing risk of a banking crisis in the next three years, according to a report from the Bank of International Settlements. Sonia Legg reports.
It's always tempting to splash out - and these days credit makes it easy, particularly it seems in China. China's credit bubble is an old problem. But with the economy slowing and diversifying towards consumer spending there's a new warning. (SOUNDBITE) (English) INDEPENDENT MARKET ANALYST, JEREMY BATSTONE-CARR, SAYING: "This latest concern emanates from the Bank of International Settlements, the so-called central bank for central banks, which is worrying about the extent to which credit appears to be getting out of control in China. The credit to GDP ration is now north of 30 percent, it's been north of 10 per cent for quite a while, at least a decade, but it is continuing to grow and therefore the BIS is probably right to warn about China's instability should the credit bubble burst." Debt has played a key role in shoring up China's economic growth since the financial crisis. But last year outstanding debt reached 255 percent of GDP, fuelled partly by corporate borrowing. Bank lending also more than double in August from the previous month due to higher demand for mortgages. (SOUNDBITE) (English) INDEPENDENT MARKET ANALYST, JEREMY BATSTONE-CARR, SAYING: "Everyone knows that at some point the bubble will burst but no-one knows when or indeed what will be the straw that breaks the camel's back so it's one of those things to keep in the back of your mind but in terms of its imminence - not quite sure." The BIS's warning means there is now a time frame - as any level above 10 percent means a crisis is likely within the next three years. And while China's not the only country in "crisis" territory it is way out in front. The debt ratio of second place Canada is 12 percent - 18 percent lower than China's.