“China is flashing warning signs that a financial crisis may be approaching, say two Nomura economists.
Those signs include a sharp rise of leverage, a slowdown in economic growth and skyrocketing property prices, assert Nomura economists Zhiwei Zhang and Wendy Chen in a research note obtained by CNBC.
Ominously, those were the same factors behind the 2008 financial crisis in the United States.
“China faces rising risks of a systemic financial crisis and the government needs to take action quickly to contain such risks. We believe the true extent of financial risks in China is not fully appreciated by investors,” they state.
However, China may be able to avoid a crisis by tightening its monetary policy, they say. “This is clearly a dangerous choice, but we cannot rule it out given political pressures to maintain strong growth.”
Leverage, defined as the ratio of domestic credit to gross domestic product (GDP), has increased from 121 percent in 2008 to 155 percent in 2012. That’s the highest since record keeping began in 1978.
“China’s leverage rose by 34 percent of GDP in five years — a worrying sign given its history,” they write, according to CNBC. By comparison, leverage in the United States increased by about 30 percent of GDP in the five years preceding the financial crisis.
Economic growth in China slowed to 7.8 percent last year, the lowest rate in 13 years, due to falling productivity and population growth….”
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