China’s banks need more capital after credit boom

CHINA’S BANKS should increase their capital buffers to protect against any sudden economic downturn following a credit boom, the International Monetary Fund (IMF) said.

In its first comprehensive assessment of China’s financial system since 2011, the IMF recommended “a gradual and targeted increase in bank capital.” In a worst-case scenario, IMF stress tests suggested the country’s lenders would face a capital shortfall equivalent to 2.5% of China’s gross domestic product (GDP) — about $280 billion in 2016 — together with ballooning soured loans.

Overall, 27 of 33 banks stresstested by the fund, covering about three quarters of China’s bankingsystem assets, were under- capitalized by at least one measure. A larger financial cushion would better reflect potentially underestimated risks stemming from the banks’ exposure to opaque investments, and absorb losses as implicit government guarantees are removed, the fund said.

China’s top four banks, led by the world’s largest lender by assets Industrial & Commercial Bank of China Ltd., have enough capital, the fund said. But it said the nation’s smaller lenders, including those focused on individual cities “appear vulnerable.”

DISPUTED RESULTS

The findings reflect the burden on a financial system that’s doubled in size in 10 years while China evolves from an export- oriented economy to one based on services and consumption. The call for capital highlights the risks during that transition caused by government policies aimed at protecting jobs or propping up failing state entities.

“Stress test results reveal widespread under-capitalization of banks other than the Big Four banks under a severely adverse scenario,” the fund said in its report. “Increasing capital would enhance the resilience and credibility of the financial system, as well as reassure markets.” The fund didn’t name the specific banks that need more capital.

Responding to the report, the People’s Bank of China said the assessment was generally fair but disputed the IMF’s interpretation of the stress test results.

“Comments about the stress test in the report do not fully reflect the results of the tests,” the central bank said in a statement on its website Thursday. “China’s financial system has shown relatively strong capability to cope with risks.”

FINANCIAL STABILITY

President Xi Jinping has highlighted financial stability as a top priority. People’s Bank of China (PBoC) Governor Zhou Xiaochuan warned in October about the