China debt crisis has economists worried

China's credit-to-GDP-gap has hit 30.1. Anything above 10 is considered dangerous (Getty)
China's credit-to-GDP-gap has hit 30.1. Anything above 10 is considered dangerous (Getty)

A global banking watchdog has issued a warning about a potential crisis for China's banking system.

The Bank for International Settlements (BIS) is concerned China's credit growth has risen to alarming levels.

The BIS says China's credit-to-GDP-gap has hit 30.1. Anything above 10 is considered dangerous.

The credit-to-GDP gap measures corporate and household debt as a proportion of gross domestic product.

This is the latest in a series of warnings about a potential banking crisis in China. Back in June the International Monetary Fund said that China's debt levels were excessive.

If you include Government debt, China's total debt-to-GDP ratio was 255 percent in March. That is actually lower than Europe and Japan. It's 271 percent for the euro area, 266 percent for the UK and 394 percent for Japan.

But what concerns the BIS, the IMF and some economists is the sheer speed at which China's debt is increasing.

Back in 2008 China's debt-to-GDP level was 147 percent. That is a rapid increase for a developing nation.

Historically any country that has had a rapid increase in debt levels has run into trouble.

The markets appear to have shrugged off the warning from the BIS. That's partly because investors have heard these warnings before, and partly because there is an assumption that the Chinese government will bail out the banks.

But some in the markets are concerned that the debt levels are getting to the point where the Chinese government would struggle to contain the fallout from a banking crisis. They point to the Chinese government's muddled response to the recent share market sell-off.

If some Chinese banks, or companies, were to fail that would bring an end to many infrastructure and property investments. That would impact commodity exporters, hurting sales of everything from steel to cement.

Even if the Government stepped in, it is likely some banks or companies would fail. This would have an impact on Chinese consumers, which in turn could hit the sales of goods like dairy products.

A particular concern for China is that a growing amount of the debt is being used to pay the interest bills on existing debt. There have also been a lot of cases in which banks have used short-term deposits to fund long-term projects.