IMF warns of brew­ing risks in China’s fi­nan­cial sys­tem

Re­port comes a day after reg­u­la­tors in Beijing drafted new rules to strengthen bank fund­ing

Gulf News - - Business -

The In­ter­na­tional Mon­e­tary Fund yes­ter­day warned of brew­ing risks in China’s bank­ing sys­tem as it found dozens of cru­cial lenders needed to beef up their pro­tec­tion against pos­si­ble fi­nan­cial crises.

The re­port comes a day after reg­u­la­tors in Beijing drafted new rules to strengthen bank fund­ing and fol­lows a number of alerts about a bal­loon­ing debt prob­lem in the world’s number-two econ­omy.

Near the top of the list in the IMF study scru­ti­n­is­ing the sta­bil­ity of China’s fi­nan­cial sys­tem is the need for banks to in­crease their cap­i­tal to ward off risks from mount­ing debt.

Out­dated model

China has largely re­lied on debt-fu­elled in­vest­ment and ex­ports to drive its tremen­dous eco­nomic growth, but the IMF said this model has reached its lim­its. Part of the prob­lem lies in high growth tar­gets, the IMF said, which in­cen­tivise local gov­ern­ments to ex­tend credit and pro­tect fail­ing com­pa­nies.

“We rec­om­mend the au­thor­i­ties The fund’s ex­perts car­ried out stress tests on dozens of banks.

China’s big four banks had ad­e­quate cap­i­tal but “large, medium, and city-com­mer­cial banks ap­pear vul­ner­a­ble”, the IMF said.

It added that 27 out of 33 banks tested, ac­count­ing for three­quar­ters of China’s bank­ing sys­tem as­sets, were “un­der­cap­i­talised rel­a­tive to at least one of the min­i­mum re­quire­ments”.

The China Bank­ing Reg­u­la­tory Com­mis­sion on Wed­nes­day re­leased a draft of fresh rules to tackle those is­sues.

The lat­est reg­u­la­tions call for new in­di­ca­tors to mon­i­tor com­mer­cial banks’ liq­uid­ity and set re­lated re­quire­ments.

They will “strengthen man­age­ment of liq­uid­ity risk for banks and pro­tect the safety and sta­bil­ity of the bank­ing sys­tem”, the com­mis­sion said. to de-em­pha­sise the GDP” growth, Ratna Sa­hay, deputy di­rec­tor of the IMF’s Mon­e­tary and Cap­i­tal Mar­kets De­part­ment, said dur­ing a news con­fer­ence.

China should “in­cite local gov­ern­ments to strengthen su­per­vi­sion on risks”, she said.

Abun­dant credit al­lows local gov­ern­ments to hit high growth fig­ures but now each ex­tra dol­lar of debt is pro­duc­ing di­min­ish­ing re­turns.

The bal­loon­ing debt — es­ti­mated at 234 per cent of gross do­mes­tic prod­uct by the IMF — adds fi­nan­cial risk and may weigh on China’s fu­ture eco­nomic growth.

“Credit growth is an im­por­tant in­di­ca­tor of fu­ture fi­nan­cial dis­tress, be­cause lend­ing stan­dards of­ten fall in the rush to make more loans,” IMF ex­perts warned. In some cases local banks face pres­sure to lend to po­lit­i­cally im­por­tant com­pa­nies, as local gov­ern­ments aim to main­tain high em­ploy­ment even if that means cash-bleed­ing en­ter­prises con­tinue to op­er­ate.

These loss-mak­ing firms, of­ten state-owned, have come to be known as zom­bie com­pa­nies, and banks and in­vestors fund many of them as if they will not be al­lowed to fail.

“Im­plicit guar­an­tees and the gov­ern­ment’s de­sire to sup­port growth en­cour­age these firms to in­vest ex­ces­sively, rais­ing al­ready-high lever­age while weak­en­ing per­for­mance on prof­itabil­ity and debt ser­vice ca­pac­ity,” the fund wrote in a re­cent re­port.

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