when China’s leadership intervened in the local Exhibit 27: Credit-to-GDP Gap Across Economies equity markets and adjusted the trading band China’s gap reached the high-risk threshold in June 2012 and around the renminbi, and by 104 basis points in has continued to rise. late 2015 and early 2016 when the leadership Credit-to-GOP Gap (% of GDP) changed the reference currency from the dollar toa basket of 13 currencies. If US financial conditions had stayed at those levels for over a year, US a GDP growth would have slowed by about one 7 rgh \, Sy ot percentage point, all else being equal. Financial i Bg? Mf" é Ne Ms conditions are the mechanism by which shocks 40 TOR XS wi " from China would have the most immediate . impact on key developed economies such as the US. 30 High Risk ~=9 ———— UK As mentioned above, one of the triggers of Elevated Risk Eurozone US recessions has been economic imbalances. 0 —== seven —< _ While we do not see such imbalances in the US, ~-—— ~~ Russia or in other major developed economies, at this 70 1975 1980 1985 1990 1995 2000 2005 2010 2015 time, we see significant imbalances in China. Such data tough 012016. imbalances have led to crises in other countries, Note: Estimates based on series of total credit to the private nonfinancial sector. Credit-to-GDP and there is no reason to believe that they will not esiittanediewns eevee" anu iolngremtens lead toa financial Crisis in China. In our view, it is Source: Investment Strategy Group, Bank for International Settlements. not a question of if—it is only a question of when, —-])yNy)})YNYN The biggest imbalance in China is the high level of debt relative to GDP. The Bank for International direct investment has reversed and is now negative. Settlements (BIS) has a series of early warning In our view, neither China’s high savings rate nor indicators. One of the more widely followed its increasing government control of financial and reliable measures is the credit-to-GDP gap, markets and capita