Why the next global crisis may stem from China

A "poisonous combination" of low economic growth and high debt could catapult the world into its next crisis, led by China and the "fragile eight" countries, warned a report by senior economists on Monday.

This year's Geneva Report, whose authors include ex-Federal Reserve economist Vincent Reinhart, said global debt levels were still rising, particularly in developing countries.

"Contrary to widely held beliefs, the world has not yet begun to delever and the global debt-to-GDP is still growing, breaking new highs. At the same time, in a poisonous combination, world growth and inflation are also lower than previously expected," Reinhart and colleagues wrote in the 16th annual Geneva Report.

Great Wall of China
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The authors said the ratio of global debt to GDP was "increasing at an unabated pace and breaking new highs". They calculated that world debt levels stood at 212 percent of the global economy, excluding the financial sector, in 2013—up 38 percent points since 2008.

The Geneva Report noted that debt accumulation was led by developed economies until 2008, but has latterly been propelled by developing economies.

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"The ongoing vicious circle of leverage and policy attempts to deleverage, on the one hand, and slower nominal growth on the other, set the basis for either a slow, painful process of deleveraging or for another crisis, possibly this time originating in emerging economies (with China posing the highest risk)," the economists said.

"In our view, this makes the world still vulnerable to a further round in the sequence of financial crises that have occurred over the past two decades."

China's debt-to-GDP ratio stood at 217 percent, according to the Geneva Report. This ratio was higher than most of its emerging market peers, but below developed economies like the U.K. and U.S. and Japan.

Debt levels are also rising in the "fragile eight" countries of India and Indonesia in Asia, Brazil, Argentina and Chile in South America, plus Turkey and South Africa. These are all major emerging markets that suffered credit bubbles and escalating current account deficits following quantitative easing by the Fed.

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All of Argentina, South Africa, India, Brazil and Turkey had debts worth more than the size of the economies (excluding the financial sector) last year, according to the Geneva Report.

"This group of countries are a main source of concern in terms of future debt trajectories, especially China and the so-called fragile eight, which could host the next leg of the global leverage crisis," they wrote.

The Geneva Report's warning comes ahead of the International Monetary Fund's update on the world economy on Tuesday, and its annual get-together from October 10-12.