A year after the Bank for International Settlements (BIS) warned that a Chinese banking crisis was likely within three years, many of the flashing red indicators that led to the warning have disappeared. The most recent economic news has been more positive, featuring increased company profits and the reform of state-owned enterprises (SOE). In truth, though, such positivity should be met with skepticism. China may have successfully managed to stem its capital outflows and started coping with its huge debt pile, but the underlying problems remain almost as large as before. After the 19th Party Congress in November, China will have to address its issues in earnest. That process is likely to be fraught with risks.
A year ago the BIS, an international organization for central banks based in Switzerland, pointed out that China's credit-to-GDP gap, the BIS's favorite indicator of financial overheating, was well over the line of danger, considered to be 10 percent. In the first quarter of 2016, China's gap hit 30.1 percent — meaning there was an extremely high risk of a banking crisis within three years. Such a high and increasing level of debt was