The likelihood that the next global financial crisis will begin in China is almost twice as high as in any other major global economy, say analysts at Deutsche Bank.
The chief economist of Deutsche Bank in the Asia-Pacific region Michael Spencer warned that the probability of a crisis in the world’s second largest economy is 13%.
According to Spencer, “it almost doubles the likelihood of a crisis in the country most vulnerable to the crisis, and almost triples the likelihood of a crisis in any other country at any given time.”
Like most discussions around the potential financial crisis in China, Deutsche Bank’s discussions focus on the huge levels of debt in the country that have grown against the backdrop of the rapid expansion of the Chinese economy over the past few decades.
“Since 2008, the level of indebtedness of Chinese non-financial corporations, households and governments has grown by more than 100% of GDP, and there is concern about financial stability,” Spencer said.
“The debt of all non-financial borrowers grew by only 36% of GDP in 2009. The monetary policy position from 2013 led to an increase in debt, while the total borrowings of the non-financial sector reached 255% of GDP at the end of last year. with each increase in the ratio of credit to GDP, there were growing problems with investors,” he continued.
Now China can become the largest economy that faces the greatest threat of the financial crisis, but Spencer noted that the probability of a crisis “is much lower than the probability of a crisis calculated for some countries before the European debt crisis or the Asian financial crisis in the late 1990s.”
This largely depends on the significant current account balance that continues to be managed by the Chinese government, which provides greater protection against any crisis.
“The current account balance, according to our estimates, plays an important role in reducing the risk of a crisis in China.If the current account was a deficit of 2% of GDP last year, rather than a surplus of almost 2%, the probability of a crisis would be 7% higher “, says Spencer.
Despite the fact that he is relatively optimistic about China, Spencer’s warnings reflect the IMF’s thoughts, which warns about the threat that China’s debt bears not only its own economy, but also the world financial system.
Last week, for example, the IMF report warned of the global risks of financial stability created by the situation in China at the moment.
The report, published after the annual fact-finding on the world’s second largest economy, noted that while China’s political class is taking steps to reduce debt levels and improve overall financial stability in recent years, it is still necessary make more efforts.
“The growing complexity of the existing system caused risks for financial stability, the growth of the loan portfolio outpaced GDP growth, which led to excess debt.The credit-to-GDP ratio is now 25% higher than the long-term trend, which is very high by international standards and corresponds to the high probability of financial crisis”, the IMF report says.
