Nisha Gopalan is a Bloomberg Gadfly columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter.

China has a bad-debt problem, that's for sure. But is it really as dire as everyone makes out?

Data released by the Basel-based Bank for International Settlements over the weekend show a key warning indicator for banking stress rose to a record in the first quarter. The nation's credit-to-gross domestic product "gap" is now at 30.1 percent, the highest in figures stretching back to 1995.

Naturally, a flurry of alarming headlines followed, and yes, China's $26 trillion pile of public and private debt does present a threat to the global economy. Total borrowing soared to an estimated 247 percent of GDP at the end of 2015, from 164 percent in 2008, faster than the increase in the U.S. and U.K. in the run-up to the 2008 financial crisis.

Something Smells Sour
Nonperforming loans in China are well off their 2011 lows
Source: Bloomberg

The BIS indicates a credit-to-GDP gap reading north of 10 percent signals an elevated risk of banking strain, but to take such a number in isolation would be misleading.

Authorities in Beijing have been making inroads in helping troubled state-owned enterprises restructure their debt, along with providing additional credit lines and lowering interest rates. According to an analysis of 765 banks by UBS, efforts to clean up the country's debt-ridden financial system are well underway, while a shift in the sort of loans in China's banking system has staved off any day of reckoning.

As Bloomberg Intelligence chief Asia economist Tom Orlik notes, total outstanding credit was up 11.2 percent year-on-year in August, slowing from a peak of 12.5 percent in March. Within that, though, there's been a marked rotation from corporate to household loans, with the former up just 10 percent, versus a 21 percent expansion in loans to households. And in China at least, mortgage loans are much safer for banks because they generally require large down payments. Such advances are also seen as less risky because they're typically secured by property.

A quick look back through the BIS data also shows that China isn't necessarily the offender it might seem. Hong Kong is no stranger to really big gaps between credit and GDP, either. Its current 18.1 percent reading may look relatively benign but in the second quarter of 2015, it was as high as 41.3 percent and touched 46.1 percent in the first quarter of that year. Super-safe Singapore has a gap of 14.8 percent, down from 22.6 percent in 2013.

Bad, But Not That Awful
China's credit-to-GDP gap has been rising and has held above 10 percent since 2012. But look at where Hong Kong's was
Source: Bank for International Settlements
Note: Credit is based on total credit to the private nonfinancial sector. Credit-to-GDP gap is defined as the difference between the credit-to-GDP ratio and its long-term trend.

Of course, in China, a significant real-estate slump could prove banks' undoing. But so far, home prices remain elevated, with increases in 64 cities in August compared with 51 in July suggesting local government attempts to cool the market are having limited impact. Besides, even when China's property bubble did burst a few years back, banks were okay.

To argue everything is fine and dandy when it comes to debt and China would be foolish. But getting overexcited about one credit metric isn't sensible either.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Nisha Gopalan in Hong Kong at

To contact the editor responsible for this story:
Katrina Nicholas at