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.
While the BIS says that credit-to-GDP gaps have exceeded 10 percent in the three years preceding most financial crises, China has remained above that threshold for most of the period since mid-2009, with no crisis so far.
But, according to BIS data, in the first quarter, China’s gap exceeded the levels of 41 other nations and the euro area.
This feeds into the debate earlier that China "needs a recession."