The Singapore Link To China’s Latest Debt Concerns

China is once again under scrutiny for its debt problems. Back in June, the Bank of International Settlements (BIS) had raised concerns over the debt situation in the country. Last week, the BIS released a report which warned of a potential banking crisis in China that could take place within three years.

The BIS is known as the central bank of the world’s central banks and it has a bird’s eye view on the finances of many different countries. These give the BIS’s views heft.

China’s problem, according to the BIS, is that its credit-to-GDP ratio is really high. The credit-to-GDP ratio is a measure of how fast a country’s debt is growing.

The BIS’s number crunching places China’s credit-to-GDP ratio at 30.1. It is the highest the ratio has been for the country and is way above the self-same ratios for major countries that the BIS tracks. For perspective, the second-highest is from Canada, at just 12.1.

China’s credit-to-GDP ratio is also higher than what the US experienced in the lead up to the 2008-09 global financial crisis and what East Asia saw prior to the 1997 Asian Financial Crisis. The BIS stated as well that a credit-to-GDP ratio of more than 10 signals that a crisis could occur in “any of the three years ahead.”

The BIS noted too that China’s debt service ratio of 5.4 is also a “potential concern.” This means China could be sensitive to changes in the interest rate environment. This is especially pertinent as the Federal Reserve in the US ponders over future interest rate hikes.

Developments in China can have impacts on investors in Singapore’s stock market. Our local stock market here has many companies with exposure to China, the world’s second largest economy.

For instance, 8% of Singapore Technologies Engineering Ltd’s (SGX: S63) assets in 2015 were based in China. Another smaller engineering firm, ISDN Holdings Limited (SGX: I07), sourced three-quarters of its revenue in 2015 from China.

Property developer Perennial Real Estate Holdings Limited (SGX: 40S) is one more example of a company with big business in China. In the second-quarter of 2016, 45% of the company’s earnings before interest and taxes came from the country.

Beyond the stock market, China was also Singapore’s largest trade partner in 2014, with two-way trade reaching S$121.5 billion in that year.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Ong Kai Kiat doesn't own shares in any companies mentioned.