The observation that both economies and markets rely far to heavily on central banks is hardly news...

Monday 19th September 2016

.....The observation that both economies and markets rely far too heavily on central banks ranks alongside the denominational preference prevailing in the Vatican City and the domestic arrangements of forest bears. Still, that doesn't mean it's not worth repeating and besides, the BIS has other things to say that really should be raising eyebrows ....

ref :- "China debt levels soar further into danger zone" The Daily Telegraph , Business

The Bank for International Settlements (BIS)  is a Basel-based financial institution established in 1930. Effectively "owned by central banks" , its mission is :

"to serve central banks in their pursuit of monetary and financial stability, to foster international cooperation in those areas and to act as a bank for central banks" ,  BIS website.

As we've touched on before, the BIS has a decent record in highlighting looming dangers to the global economy and is accorded a good deal of respect in the financial community ..... which unfortunately is a long way from saying that its advice is always acted upon. Yesterday BIS chief economist Claudio Borio made reference to the fact that central banks "have been overburdened for far too long" , and that ultra-low rates and QE bond purchases leave markets hugely sensitive to any hint of a change in central bank policy. He also suggested that the massive rally in bond prices (and fall in yields) did not reflect the risks involved. Even corporate debt has been trading with negative yields, and one has to question the logic of stock markets trading near record highs at a time of collapsing profit growth.

And guess what ? A growing perception that central banks may be close to running out of both the will and the ability to unveil stimulative measure after stimulative measure has caused a sharp reversal in bond markets (and spike in yields)  --  a so-called mini tantrum. Quite where we go the immediate future is unclear and much will depend on the actions and words of the Bank of Japan and the Fed on Wednesday. But Mr Borio's comments on the vulnerabilities of bond markets came as part of a wider warning about the credit system in general and the very real threat of a banking crisis posed by China's huge corporate debt levels in particular.

According to the BIS, China's credit-to-GDP gap has hit 30.1%. The "gap" refers to the difference between its credit-to-GDP ratio and its long-term average, and a sharp rise in the number can signal that credit growth is excessive and that a financial bust is on the cards. By any normal standards, you'd have to say that China's figure of 30.1% should be ringing the loudest of alarm bells. It is China's highest number so far (measured since 1995) and is a long way clear of other major nations. More to the point, it is more than three times the level of 10%  which signals an elevated risk of strain in the banking system and demands close monitoring.

That doesn't sound too clever, does it ?  But those defending China's position point out that the state's control of the financial system and the low levels of OVERSEAS debt reduces the risk of any banking crisis. Besides which, it may be true that the majority of financial crises are preceded by three years of a credit-to-GDP gap of above 10%, But China has avoided a banking crisis whilst exceeding that number for 7 years now.

Mmmm ..... you could take that last point either of two ways we suppose but we'd all better hope the optimists are proved right because the bare numbers do make worrying reading :

China's total credit reached 255% of GDP at the end of 2015 (up 107% in 8 years) and rising by about 5% per quarter

Corporate debt alone is 171% of GDP

Outstanding loans reached $28 trillion, about the same as the commercial banking systems of the US and Japan combined

Frankly, in their role as enablers of financial stability it's only right for the BIS to bring this to the attention of those that matter, in particular the Chinese authorities. The trouble is that despite promises to address the issue, that gap just keeps on getting bigger .....

not terribly comforting if you imagine what might happen if rates should rise by  2.5%. Which incidentally is another of the measures used by the BIS and one that has China waving all sorts of red flags .... so to speak.