Daily Management Review

Bank of England’s Growing List of Concerns is Topped by China’s 'Extraordinary Leverage'


11/30/2016




Bank of England’s Growing List of Concerns is Topped by China’s 'Extraordinary Leverage'
According to a report published on Wednesday which warns that risks to global stability have spiked in the past six months, China, euro zone sovereign debt and the potential fallout from Brexit top the escalating list of concerns for the Bank of England (BOE).
 
"Vulnerabilities stemming from the global environment and financial markets, which were already elevated, have increased further since July" states the U.K.'s central bank's semi-annual Financial Stability Report.
 
The reported clearly notes that there has been a 100 percentage point spike in China’s  non-financial sector debt relative to gross domestic product (GDP) since the 2008 financial crisis and the country's burgeoning debt levels and rapid rate of credit expansion are singled out as significant red flags for the economies around the world. At the present moment that ratio of debt to GDP is around 260 percent of GDP.
 
"This is extraordinary leverage for an advanced, let alone, an emerging economy," the BOE Governor Mark Carney said at a press conference to launch the report.
 
Also strongly highlighted as reasons for concern were a 3 percent depreciation in the Chinese renminbi against the U.S. dollar since the publication of the BOE's July report and the "near-record" pace of net capital outflows from China during the third quarter.
 
Firstly, existing sovereign debt dynamics and, secondly, threats to the resilience of parts of the trading bloc's banking system were the key risks emanating from some euro area economies that the BOE governor broke down the risks emanating from the nearer neighbors.
 
On the back of either trade or political headwinds, there has been elevated sovereign debt levels to a leap in borrowing costs or diminished growth prospects which enhance vulnerability, Carney noted.
 
The governor, while talking about the U.K. conditions, noted that banks located domestically currently account for over 75 percent of foreign exchange and derivatives activity in the U.K. and supply over half of the debt and equity issuance from continental firms while mentioning about the looming specter of the U.K.'s impending departure from the European Union (EU) and the negative impacts it could have o the economy.
 
As he discussed the risk of a disruption in services provided to the European real economy spilling over to hit the U.K. economy through trade and financial links, consequent fears of contagion were emphasized by Carney.
 
The governor went on to acknowledge that a lack of clarity over how Brexit will unfold means many unknowns cloud the current outlook while clearly stating that the largest risks to U.K. financial stability are global in nature.
 
"It will take time to clarify the U.K.'s new relationships with the EU and the rest of the world. And the orderliness of the U.K. economy's adjustment to these changes will influence the risks to financial stability," Carney said.
 
(Source:www.cnbc.com)






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