China the Epicenter of a New Global Banking Crisis, BIS Warns
The Bank for International Settlements, or BIS, warns that China’s banking policies are likely to generate a new international banking crisis within the next three years. The BIS, which is the world’s largest bank, issued the warning despite finding that no immediate threat is likely according to a Reuters.com report. The risks are intensified by China’s high load of national debt, and even minor economic turmoil in global markets could result in China’s debtors defaulting on their loan obligations.
Financing the world’s global business has been part of China’s long-term income-generating strategy for decades, and its national debt reached 255 percent of GDP in 2015, which was up 35 percent from just two years earlier. Most of the increase was attributed to corporate borrowing, and as borrowers struggle to repay their obligations in a weak economy, the prospect of massive defaults looms large over the country’s banking health. The ratio of debt-to-GDP could reach 300 percent by 2020.
China’s Economic and Banking Policies Could Trigger Another Global Meltdown
The BIS quarterly report warned of China’s large credit-to-GDP gap of 3:1 according to a report posted at Telegraph.co.uk. This alarming figure puts China in a league all its own when compared to other world economies. The score is higher than in the United States before the Lehman and subprime-mortgage crises triggered global chaos in 2008 and more threatening than the numbers during 1997’s East Asian speculative boom. U.S. economist Hyman Minsky developed this method of gauging banking risks more than 60 years ago, and any score or 10 or higher is considered to be a cause for increased concern and careful monitoring.
China’s Unique Banking Structure Could Make the Statistics Less Dire
A BBC.co.uk report offers some favorable insights that could prevent a full-blown banking crisis. In China, the government owns the banks, so it’s likely that the government would bail them out of any crisis. In fact, economic analysts expect that it would take about $100 billion to shore up the banks and put international financiers at ease. Other favorable signs in China include high domestic-savings rates, closed capital accounts, government control of banks and household debt that falls within banking best practices. Most of the worrisome debt comes from the country’s corporate sector. Currently pegged at 7 percent of GDP, this conservative estimate doesn’t include shadow-banking debt, which experts believe is a major factor in China’s economy.
China’s Premier Li Keqiang Looks to Wean His Country from Debt-Driven Growth
Chinese Premier Li Keqiang has indicated that he wants to expand China’s economy and wean its reliance on debt-driven growth before the economy triggers a meltdown. China is prepared to inject money into the central bank if default rates become dangerously high, but the risks of global catastrophe are strong and, according to Hudson.org research, these risks include:
- China’s outstanding loans have passed $28 trillion, which is more than the combined debts of Japan and the United States.
- Zero or negative interest rates have become common in global economies.
- Recent economic rallies have been sluggish.
- Stocks seem to be overvalued.
- Brexit worries complicate financial forecasts.
- Global bond yields have fallen below nominal GDP growth rates.
Surviving with a crushing debt-to-GDP rate, however, is not unprecedented according to the Hudson.org research. Britain reached a 268 percent rate in 1822 but skillfully used its banking expertise to expand its empire and defeat all its empire-building challengers. However the tradeoff was higher tax rates for its citizens than those of other countries.
The Central Bank of Central Banks Controls More Money Than Any Country
The Bank for International Settlements has tremendous influence in finance, and many casual investors don’t realize how much control of the money supply that this institution has according to a Newzsentinel.com report. When the BIS warns of a global financial problem, it’s important to pay attention because the bank essentially controls the world’s money supply. The bank is headquartered in Basel, Switzerland with branches in Mexico city and Hong Kong. The central banks of 58 countries belong to the BIS, but this independent bank is not responsible to any single country, government or political affiliation.
Warnings from the BIS, International Monetary Fund, investment advisers and global central banks have recently united in predicting an imminent financial meltdown. China’s huge population, ownership of global businesses and unified approach in policy-making initiatives could spell trouble for other economies if the country attempts to transfer its burdens to other economies. Find out more about the BIS, China’s current banking crisis and other investment news at the PersonalMoneyStore.com.