“It’s Coming To A Head In 2016” – Why Bank of America Thinks The Probability Of A Chinese Crisis Is 100%

• “It’s Coming To A Head In 2016” – Why Bank of America Thinks The Probability Of A Chinese Crisis Is 100%
  by Tyler Durden, www.zerohedge.com 
  Some sobering words about China’s imminent crisis, not from your friendly neighborhood doom and gloom village drunk, but from BofA’s China strategist David Cui.
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  Excerpted from “2016 Year-Ahead: what may trigger financial instability“, a must-read report for anyone interested in learning how China’s epic stock market experiment ends.
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  A case for financial instability
  It’s widely accepted that the best leading indicator of financial instability is rapid debt to GDP growth over a period of several years as it’s a strong sign of significant malinvestment. Based on Bank of International Settlement’s (BIS) private debt data and the financial instability episodes identified in “This time is different”, a book by Reinhart & Rogoff, we estimate that once a country grows its private debt to GDP ratio by over 40% within a period of four years, there is a 90% chance that it may run into financial system trouble (Table 1). The disturbance can be in the form of banking sector re-cap (with or without a credit crunch), sharp currency devaluation, high inflation, sovereign debt default or a combination of a few of these (Table 2).
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  As Chart 1 demonstrates, China’s private debt to GDP ratio rose by 75% between 2009 and 2014 (i.e., since the Rmb4tr stimulus), by far the highest in the world (we suspect a significant portion of the debt growth in HK went to China). At the peak speed, over four years from 2009 to 2012, the ratio in China rose by 49%.
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