The Irish and Spanish financial crises that roiled Europe during the Global Financial Crisis both had their origins in an overheated property and construction section that left banks with huge loans on their books which could not be repaid when the sector was hit by the crisis. The Irish crisis precipitated the need for a sovereign IMF/EU bailout whereas the Spanish help was limited to its banks themselves. The Bank for International Settlements (BIS) is warning that some Chinese banks are seriously over-exposed.
Few people will have heard of BIS. It was originally set up in Switzerland in 1930 as a European entity to settle reparation payments imposed (mainly) on Germany at the end of the Great War. With the advent of the Great Depression, its role became one of facilitating technical cooperation between central banks. It took on global responsibilities back in 1961 and its mission is to help central banks in their work to provide monetary and financial stability; build international cooperation between central banks and act as a bank for the central banks.
BIS is concerned that China’s credit-to-GDP gap (borrowing in relation to GDP compared to its long-term trend) indicates stress. BIS rates a credit-to-GDP gap in excess of 10 to be an indicator of potential danger: China’s is currently 30.1 (up from 25.4 last year).
According to the IMF, Chinese banks hold $1.3 trillion worth of loans which may be (or become) distressed. The Chinese government provided a credit boom as a tool to handle flagging growth in the immediate aftermath of the Global Financial Crisis. Of course, many Chinese banks are either state owned or under state control, so the government can act directly should the sector need help – the joys of being in a Communist state, one assumes.