IMF warns China's financial system vulnerable

by lexie Tue Nov 15, 2011 8:24 am

Nov 14, 2011 22:44 EST

IMF warns China's financial system vulnerable

China's financial system is at risk from bad loans, booming private lending and sharp falls in property prices, the International Monetary Fund warned Tuesday, as it called for sweeping reforms.

In its first formal evaluation of China's financial system, the Washington-based lender blamed "heavy" government involvement in the country's banks and watchdogs for reducing market discipline and corporate governance.

The fund also called on Beijing to relax its control of the yuan currency and allow the central bank more freedom over policy decisions.

Rampant lending since the 2008 financial crisis has left many companies and local governments in China with huge debts, while a recent slowdown in economic growth and falling property prices has fuelled fears of an explosion in defaults.

While China's financial sector was "robust overall", inefficient credit allocation and other weaknesses needed to be addressed, said Jonathan Fiechter, deputy director of the IMF Monetary and Capital Markets Department.

"While the existing structure fosters high savings and high levels of liquidity, it also creates the risk of capital misallocation and the formation of bubbles, especially in real estate," said Fiechter.

China is one of 25 "systemically important countries" that has agreed to mandatory evaluations at least once every five years, the IMF said.

However, it added that a full assessment of the risks was hampered by "data gaps", limited information and restrictions on access to confidential figures, the IMF said.

In a list of 29 key recommendations on how Beijing can improve its financial system the IMF urged policymakers to allow state-owned banks to make lending decisions based on commercial risk rather than government policy.

It urged Beijing to use market-based tools such as interest rates to control credit rather than administrative measures to limit lending.

It also called on authorities to loosen currency controls and give autonomy to the central bank and other supervisory bodies to "help bring the system more in line with international practices".

"A well-composed and properly implemented plan ... will make an important contribution to sustaining China's growth," the IMF said.

Despite numerous vulnerabilities in the system, the IMF said stress tests of China's 17 largest banks found most of them would be resilient to "isolated shocks".

But a confluence of events such as a slump in property prices, changes in the exchange rate and a sharp slowdown in economic growth could "severely" impact the sector, it warned.

Source: AFP Asian Edition

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