The "credit-to-GDP", a measure that combines the rate of credit growth and its long-term trend showed alarming data on the Chinese debt burden, drawing parallels with other pre-crisis periods. The measure showed 30.1, a figure way above the critical level of 10, which historically gives signals of financial distress likely to result in a banking crisis. The level is reportedly well above levels before the East-Asian Speculative bubble, as well as the 2008 US pre-crisis gauge. Canada, the economy with the second highest "credit-to-GDP" rate shows a figure of 12.1.
© BIS
Analysts and bankers, however, do not seem to agree with the dramatic numbers, suggesting that the Chinese economy has plenty of options to fix the credit cycle. Some of the major determinants for this stance include the majority of state owned banks, underdeveloped capital markets as well as the liquidity of China's lending system, characterized by a 65-80% rate of loans over deposits. While the savings rate remains high, there is enough space to implement policies to target China's undeniable debt problem.
Historical Credit-to-GDP gap
© Financial Times; BIS
What worries top bankers the most seems to be the dissonance between low bond yields and non-volatile surging equity prices, that suggests that overvaluation of equity might point in the direction of a potential burst, stemming from the Brexit vote aftermath. With the debt level almost doubled since last month, mortgages showed a sharp surge, and combined with potentially inflated asset prices caused worries about the share of bad debts in the economy.
The first debt-to-equity swap right granted to Sinosteel, a state-owned metals trader, could be the beginning of a trend likely to serve as a patch for the immense levels of company borrowing, but fails to address the problem in its core.
China Households Debt to GDP
© Trading Economics
Domestic Credit to Private Sector (% of GDP)
© Trading Economics
Following the Global Financial Crisis, China turned to debt to heal the economy, causing the debt burden to add up to 255% of GDP in 2015, mainly due to company borrowing and an increase in mortgage demand. It still remains unclear what action will PBOC take to reduce its debt levels, and speculation shows concerns about whether there is, in fact, a cure to turn to.