China Special Update: September 2016

Warning signs for China’s financial sector don’t guarantee crisis

By

Recent data from the Bank for International Settlements has raised concerns around China’s financial stability. The ‘credit gap’ – a measure that seen as an early warning sign for financial crisis – has increased rapidly, and is three times higher than the ‘danger’ level.

We have previously noted concerns around China’s debt levels, and the difficult choices authorities face between short (slower growth) and medium term (potential debt crisis) challenges in addressing the issue.

That said, we do not anticipate a Chinese financial crisis in the short term. This largely reflects the low level of foreign debt, the still relatively restricted capital account and the level of state control in the banking sector. However, continuing to allow credit growth – particularly to highly indebted SOEs – adds to medium term risks for China.

For further details, please see the attached document: