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BIS warns China facing a banking crisis

BIS The Bank of International Settlements has warned that China is one of the economies most at risk of a banking crisis. In a report, which included a study of the early signs of banking crisis, the Bank of International Settlements said China’s debt – measured by a credit-to-GDP gap- surpassing an amount that could lead to a system fallout. The country also has a high level of debt servicing ratio, which made its banking system more vulnerable. The credit-to-GDP gap measures the difference between the percentage of debt in an economy and its long-term trend. A bigger number suggests debt is growing at a pace that may not be healthy for the economy. Debt servicing ratio, meanwhile, refers to the amount of money as a proportion of income that’s used to repay loans. A higher ratio means borrowers may have taken on too much debt than what their income can support. In addition to China, the BIS report also found Canada and Hong Kong to be at risk of a banking crisis. The vulnerabilities of those two economies were partly caused by climbing property prices. BIS, however, said despite signs pointing to the banking systems in those three economies being distressed, it does not mean China, Canada and Hong Kong are heading into a crisis. The indicators have been calibrated based on experience and cannot take account of broader institutional and economic changes that have taken place since previous crises, it said. The BIS is not the first international body to flag risks in China. The International Monetary Fund, in a report published in December, identified three “major tensions” in China’s financial system that could derail the world’s second-largest economy.

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