International Monetary Fund warns over 'large risks' for China's financial system

Marco Green
December 7, 2017

It first assessed China's financial sector in 2011, and the International Monetary Fund assessment report released on Wednesday was the second one on China.

The result is "moral hazard and excessive risk-taking", the IMF's Financial Sector Assessment Program (FSAP) team said. Corporate debt was now at 165 percent of GDP, the report said, while household debt had also risen quickly over the past few years. The Bank for International Settlements (BIS) - also known as the central bank of central banks - for example, warned that the Chinese banking sector could be facing an imminent blowout, raising worries about its effect on the world economy.

A stress test on China's banks found four-fifths were vulnerable.

According to the IMF assessment, China's regulation and supervision of its banking, insurance, and securities sectors show a high degree of compliance with global standards.

She added that "implicit guarantees to SOEs [state-owned enterprises] need to be removed carefully and gradually".

The IMF recognized the fast development of China's financial market amid the steady economic growth and referred to it as "a large, dynamic and interconnected financial system".

At times there had been pressure to keep struggling firms open rather than allowing them to fail - a policy that could conflict with financial stability, it added. Supervision of banks had been tightened up but demand for high-yield investment products had led to attempts to escape regulations though increasingly complex investment vehicles.

Risks are particularly high at a local level where pressures to keep non-viable businesses afloat are strong and conflict with financial stability, the International Monetary Fund said. "We recommend the authorities to de-emphasize GDP growth", Sahay added, under efforts to "encourage local governments to strengthen supervision of risk". The IMF recommended China form a financial stability sub-committee comprising the central bank and regulatory agencies and provide more staff for the banking regulator.

But it said it did not go along with all of the findings and that the stress tests "do not fully reflect the whole picture".

The IMF warned in October that China's dependence on debt was growing at a "dangerous pace". Standard & Poor's in September cut China's credit rating, for example, leading to criticism from Beijing.

Other reports by Click Lancashire

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