Next global crash could come "with a vengeance", central bankers have warned

 
Jasper Jolly
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Mark Carney sits on the board of the Bank of International Settlements

Risks building up in China and other emerging markets could trigger the next global financial crash, an influential group of central bankers has warned.

China and other developing economies such as Thailand are beginning to show the same signs of tensions seen in the US and UK before the global financial crisis of 2007-08, according to the annual report of the Bank for International Settlements (BIS).

An abrupt end to the current period of growth could come "with a vengeance," said Claudio Borio, head of the BIS monetary and economic department.

“Leading indicators of financial distress point to financial booms that in a number of economies look qualitatively similar to those that preceded the global financial crisis,” Borio added.

Read more: Moody's has downgraded China's credit rating

The BIS, sometimes known as the central bank for central banks, warned of deep problems looming over the world economy.

Major central banks may be forced to raise interest rates to combat inflation, “smothering” growth, while debt build-ups and the rising tide of protectionism threaten to bring the current global expansion to an end.

Borio said: “That end may come to resemble more closely a financial boom gone wrong, just as the latest recession showed, with a vengeance.”

China and other emerging market economies avoided much of the worst of the crash, but they could be vulnerable to a perfect storm of multiple big risks. Rising debt levels in China could make it more vulnerable to rising interest rates or a shock from lower demand.

Read more: MSCI has added mainland Chinese A-shares to its key emerging markets index

While the last global financial crisis was triggered by sub-prime debt lent to American households, the Chinese debt load is spread through both corporates and households. Chinese corporate debt has almost doubled since 2007 to reach 166 per cent of GDP, while household debt jumped in the last year to 44 per cent of GDP.

Meanwhile the BIS’s so-called credit-to-GDP gap indicator shows debt is building up far above long-term averages. The measure, an “early warning indicator” for a country’s banking system, shows China, Hong Kong and Thailand are extended far beyond other major economies.

China’s ratio stands at 24.6, according to the BIS, indicating its banking sector is far more stretched than the UK or US, which show negative readings on the same scale.

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