China’s credit-to-gross domestic product "gap" has reached 30.1%, the highest for the nation in data stretching back to 1995, according to the Basel-based Bank for International Settlements. As Bloomberg points out, the warning indicator for banking stress rose to a record in China in the first quarter, underscoring risks to the nation and the world from a rapid build-up of Chinese corporate debt.
The gap is the difference between the credit-to-GDP ratio and its long-term trend. As BIS explains:
The build-up of excessive credit features prominently in discussions about financial crises.
While it is difficult to quantify “excessive credit” precisely, the credit-to-GDP gap captures this notion in a simple way.
Importantly from a policy perspective, large gaps have been found to be a reliable early warning indicator (EWI) of banking crises or severe distress.
Readings above 10 percent signal elevated risks of banking strains. A blow-out in the number can signal that credit growth is excessive and a financial bust may be looming.
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