International institutions concerned about soaring indebtedness in China

BOFIT Viikkokatsaus / BOFIT Weekly Review 2015/39

The Bank for International Settlements (BIS) data for January-March reveal several “early-warning” indicators that point to increased risk of a domestic banking crisis in China. The rate at which Chinese have been piling on debt was particularly alarming. The ratio of China’s credit stock to GDP has risen to 25 % above the long-term trend. The trend divergence is so large that in two of three cases this has historically led to a banking crisis. Brazil and Turkey also exceeded this critical level. Earlier, also the IMF has noted that, historically, in countries where indebtedness has occurred as rapidly as in China, the rise has led to banking crises.

One of the BIS early-warning indicators, the debt-servicing ratio, has soared in China. The debt-servicing ratio is the share of earnings going to paying interest and loan principal. This ratio is already 20 % for China’s private sector, or 6 percentage points above the long-term average. Among countries tracked by BIS, the only larger divergences from the average long-term trend are in Hong Kong and Russia. In particular, a rise in interest rates in China would send the debt-servicing ratio skyward.

In January-June, China’s five largest banks reported that they were writing down 140 billion yuan’s worth of non-performing loans (NPLs), or more than for all last year. The amount of NPLs held by the banking sector rose by about 250 billion yuan in the first six months of the year, matching the amount of increase for all of 2014. As of end-June, the NPL stock of Chinese banks amounted to 1.09 trillion yuan (€150 billion) and represented about 1.5 % of the credit stock (up from 1.3 % at the end of 2014). Many observers note that the NPL stock is likely much larger than officially reported.

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