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While China was flagged, a key warning indicator known as the credit-to-gross domestic product “gap” showed an improvement, said the BIS, known as the central bank for central banks. This may suggest the government is making progress in its push to reduce financial-sector risk.

The gap is the difference between the credit-to-GDP ratio and its long-term trend. A blow-out in the number can signal that credit growth is excessive and a financial bust may be looming. In China, the gap fell to 16.7 percent in the third quarter of 2017, down from a peak of 28.9 percent in March 2016 and the lowest since 2012, the study showed.

The narrowing gap in China “suggests the efficiency of financial intermediation is improving,” said Ding Shuang, chief economist for Greater China and North Asia at Standard Chartered Plc in Hong Kong. “This helps to slow the pace of the rise of the debt-to-GDP ratio, creating conditions for an eventual deleveraging of the economy.”

Financial Crackdown

China is getting serious about dangers in its financial system. While derisking has been the government’s mantra since 2015, the country’s most powerful politicians have been ramping up directives on everything from shadow banking to stock-market speculation. Since April last year, financial regulators have targeted curbing the growth of wealth management products and interbank borrowings, with a more recent focus on reining in household debt.

The Basel, Switzerland-based BIS routinely collects and analyzes data to monitor vulnerabilities in the global financial system. These figures typically include the amount of credit in an economy and house prices, as well as borrowers’ ability to service their debts.

For this study, the analysts assessed household borrowings and cross-border or foreign-currency liabilities as potential sources of vulnerability by back-testing them against earlier crises. They then scored the indicators by the amount they currently deviate from long-term trends.

Bloomberg.com