China could be on the brink of a "full-blown banking crisis" after failing to curb excesses in its credit system, according to the world's top financial watchdog.
Despite pledges from Chinese authorities to wean the economy off debt-driven growth, a quarterly report from the Bank for International Settlements (BIS) has shown the gap between credit and GDP is now 30.1, compared to 25.4 last year.
This figure is three times BIS' danger threshold of ten percent – anything over this indicates a risk of a financial collapse within the next three years is ten percent.
China's credit to GDP gap was the highest of the 42 countries included in the BIS survey, which included cash-strapped Greece, far outstripping second-place Canada's score of 12.1. The 30.1 figure is "significantly higher than the scores in East Asia's speculative boom in 1997 or in the US subprime bubble before the Lehman crisis", says the Daily Telegraph.
China's total credit, including government, corporate and household debt, reached 255 per cent of GDP last year, with outstanding loans totalling $28 trillion, more than the commercial banking systems of the US and Japan combined.
"Because China is a key driver of global growth, any crisis in its banking industry could cause catastrophe around the world," Sky News reports.
Analysts at UBS, however, have said that central government control over the banking system, large foreign exchange reserves and untapped capital markers mean a banking crisis is unlikely. Nonetheless, they predict that China's credit could reach 300 percent of GDP by 2020.
China's government is also introducing a raft of new measures to curb excesses in the credit system, including writing off more than £230bn of bad loans and introducing debt for equity swaps.