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Credit to GDP gap
The Bank for International Settlements (BIS) dubbed the central bank of central banks – said a gauge of credit to GDP gap in China shows the Chinese debt had hit a record high in the first quarter of the year.
The Bank for International Settlements (BIS) dubbed the central bank of central banks said a gauge of credit to GDP gap in China shows the Chinese debt had hit a record high in the first quarter of the year. China's credit-to-GDP gap reached 30.1 per cent in the first quarter of 2016, its highest level ever and far above the 10 per cent level thought to present a risk to a country's banking system, the Switzerland-based bank said in a quarterly report.
The high ratio in the case of China point to "financial overheating and potential financial distress" in the medium term and to highlight the fact that rapid credit growth could "sow the seeds" for future crises. The rapid increase in credit in an economy is now commonly perceived to be one of the leading indicators of financial instability. This view has been reinforced by the aftermath of the international financial crisis, which commenced mid 2007.
The credit-to-GDP gap is a measure that provides advanced signals of banking system stress and can be used to as part of a set of central bank policy tools to mitigate banking system risk. Under the Basel Committee on Banking Supervision (aka Basel III), as I noted above, the countercyclical capital buffer system of the banking system should be raised when a nation's credit-to-GDP ratio (where credit is defined as credit given to the household and private non-financial corporate sector or HH and PNFC credit) exceeds its long-term trend by according to viableopposition.blogspot.in.
The credit to GDP gap measures deviations from normal patterns within any one country and therefore strips out cultural differences. It is based on work the US economist Hyman Minsky and has proved to be the best single gauge of banking risk, although the final denouement can often take longer than assumed. Indicators for what would happen to debt service costs if interest rates rose 250 basis points are also well over the safety line. China’s total credit reached 255 pc 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, writes The Telegraph.
