At one level, this seems to be China’s moment. At a time of growing political incoherence and diminished leadership in the US and Europe, China seems to be the only adult in the house, taking the leadership on issues of critical importance to the globe such as trade and climate change. On the surface, the economy looks better, with economic growth stable, receding deflationary pressures and strong consumer confidence.

But, just as investors breathed a sigh of relief, new risks seem to be emerging. The financial sector is raising questions, while the rapid depreciation of the renminbi has increased speculation that a further fall in the currency could destabilise emerging economies. Given how important China is to the world economy and Asia, we need to understand how serious these risks are and what could go wrong, starting with the growing financial challenges.

Financial indicators are flashing red
The rapid pace at which China’s credit binge unfolded continues to create stresses in the financial system. Authoritative commentators are increasingly warning of rising risks for a variety of reasons:

• The Bank of International Settlements has turned more cautious. BIS employs a measure comparing the actual credit-to- GDP ratio with its trend line. This so-called credit-to-GDP gap has reached 30.1 in China. Since BIS believes any level exceeding 10 signals an impending crisis, it sees a high risk of China suffering a banking crisis within the next three years