IMF China Report: Debt Poses Significant Financial Risk

Chinese President Xi Jinping

The IMF report said authorities at the highest level had made financial stability a top priority this year and were "taking steps to address vulnerabilities" but added that some of the underlying causes of risk were yet to be fully addressed. More capital is justified for the largest banks due to their systemic importance and interconnectedness, the International Monetary Fund said.

An over-dependence on debt to fuel China's growth and a fragile financial sector will exacerbate an economic downturn; the effects of which could be felt worldwide. Corporate debt was now at 165 percent of GDP, the report said, while household debt had also risen quickly over the past few years. "Credit growth has outpaced GDP growth, leading to a large credit overhang".

Stress test results revealed widespread under-capitalization of banks other than the Big Four banks under a severely adverse scenario.

The IMF said it had carried out stress tests on dozens of banks and that the big four banks had adequate capital but "large, medium, and city-commercial banks appear vulnerable".

"Implicit guarantees to SOEs [state-owned enterprises] need to be removed carefully and gradually", she said. There had been a commitment to supporting growth and jobs, coupled with pressures to keep non-viable firms open.

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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". 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.

The report said reining in excessive growth would require China to reduce emphasis on high GDP projections in national plans, which have spurred local authorities to set high growth targets. "The Chinese authorities have worked hard to keep pace with growth and innovation, but as in all countries, many gaps remain", the International Monetary Fund said.

China's central bank, the People's Bank of China, said overall a series of reports published by worldwide bodies including the IMF were "professional and valuable assessments".

China's economy beat expectations by growing 6.9 percent in the first three quarters of the year, though several global credit agencies have sounded the alarm about rising debt.

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