From Paul Panckhurst and Adrian Leung at Bloomberg:
China’s reading is the nation’s highest on record in the gauge released by the Bank for International Settlements. It’s the single most reliable indicator of looming financial crises, according to the BIS, which found in a 2011 analysis of 36 countries that a majority of banking crises followed readings higher than 10 percent.
The credit-to-gross domestic product “gap” focuses on the amount of credit provided to households and businesses as a share of gross domestic product. It shows when the ratio of credit to GDP is blowing out – suggesting a credit boom and the risk of trouble brewing.
It isn’t advisable to place total reliance on a single indicator, but the rate of credit growth in China is alarming — and unsustainable in the long-term.
The banking industry in China is distinctly different from in Western countries. Credits are given to “well connected” people to invest in state supported industries. When using the indicator for China we will have to also consider whether the government there may support the banks at all cost and whether their export oriented economy has already been on life support for being overly unbalanced.