China's financial system harbours "large risks", says International Monetary Fund

The IMF said China's growth has been supported by a financial system that is increasingly complex and lacks rigour.

"Overall, the reports have presented professional and valuable assessments of China's financial system and its recommendations are highly relevant in the context of deepening financial reform in China", the PBOC said.

"In terms of resources, the CBRC as with the other supervisory agencies under (PBOC) have been working with a headcount that hasn't changed in 10 years, a period in which the Chinese financial sector has more than doubled in size", Piris told reporters.

Further, IMF said the credit to GDP ratio is very high by worldwide comparison, and above levels consistent with a high probability of financial distress.

But the near-term prioritisation of social stability seems to depend on credit growth to sustain financing to firms even when they are non-viable, it said.

"This level is very high by global comparison, and already above levels consistent with a high probability of financial distress", the IMF said.

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"The apparent primary goals of preventing large falls in local jobs and reaching regional growth targets have conflicted with other policy objectives such as financial stability", the report said.

Meanwhile, corporate profitability has improved this year, and local government borrowing has been backed by long-term cash-generating assets, making very limited room for any underestimation of NPL ratio, the central bank said. The government should also put more focus on restructuring the operations of distressed companies that could survive rather than resolving their debt problems. These factors could undermine authorities' ability to measure asset quality, and to assess and mitigate risk, the International Monetary Fund said, calling for the government to beef up supervision of financial institutions, especially conglomerates and firms in the fintech sector. The IMF and World Bank launched the FSAP in 1999 to gauge the stability and soundness of the financial sector, the regulatory framework of member economies and financial sector's potential contribution to growth.

The tensions identified include China's rapid build-up of credit and risky lending moving away from banks toward less-regulated parts of the financial system, while implicit guarantees added to these risks. More capital is justified for the largest banks due to their systemic importance and interconnectedness, the International Monetary Fund said.

"It is essential that the regulators expand their range and depth of skills before industry developments leave them unable to maintain meaningful oversight and authority", the report said.

In a report, released Wednesday, the Washington-based lender said buffer capital would help to absorb potential losses.

The stress tests covered banks holding 171tn yuan ($26tn; £19bn) in total assets, and 27 out of the 33 tested needed to raise more funds, despite already complying with Basel III regulations on bank capitalisation.

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