S&P issues warnings on Chinese banks

Liao Qiang, Beijing-based senior director for financial institution ratings at S&P Global Ratings said that the contagion risks at Chinese banking sector are definitely rising. He said, "The pace of the development is concerning. If this isn’t stopped in time, the central bank will lose some control and flexibility of its monetary policy." Small Chinese banks are increasingly reliant on each other to raise funds. A study by Moody’s Investor Service shows that for small and medium-sized banks the 34 percent of all funds come via interbank market.

From just $7 trillion in 2007, the total debt in China has risen to $28 trillion by mid-2014 and is still rising. China’s gross leverage, which is measured by total debt to GDP, is now hovering just below 300 percent. Last week, the Bank of International Settlements (BIS) has warned on China’s debt to GDP gap, which has hit 30.1 percent, three times the level critical for banks. This indicator is accepted as one of the most reliable indicators of a looming banking crisis.

It is estimated that the total debt would rise to 320 percent of GDP by the end of the decade. The level of leverage poses risks to the global economy and financial sectors.