Debt Poses Significant Financial Risk — IMF China Report

08 Décembre, 2017, 01:05 | Auteur: Auguste Feret

The IMF's health check of China's financial system found that credit was high by worldwide levels, that personal debt had increased in the past five years, and that the pressure to maintain the country's rapid growth had bred an unwillingness to let struggling firms fail.

Banks participated in the test were classified into five, namely the big-four banks, large banks, medium, city commercial banks and rural banks.

According to the stress test conducted among 33 banks, 27 banks were under-capitalized.

The report follows a series of alerts over the debt pile which has ballooned in China alongside its rapid economic expansion. Corporate debt was now at 165 percent of GDP, the report said, while household debt had also risen quickly over the past few years.

According to the IMF's health check of China's financial system, four-fifths of the country's banks are at risk.

While the country's banking system meets the requirements of global banking rules known as Basel III, "current circumstances warrant a targeted increase in capital", the report said, adding: "This would create a buffer to absorb potential losses that can be expected during the economic transition as credit is tightened and implicit guarantees are removed". More capital is justified for the largest banks due to their systemic importance and interconnectedness, the International Monetary Fund said.

"The IMF has highlighted two critical issues in China's financial sector", Linda Yueh, Adjunct Professor of Economics at the London Business School, told DW. Local government leaders were aiming to maintain high employment "even if that means cash-bleeding enterprises continue to operate".

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At times there had been pressure to keep struggling firms open rather than allowing them to fail - a policy that could conflict with financial stability, it added.

"The system's increasing complexity has sown financial stability risks", the IMF's assessment said.

There had also been growth in increasingly complex investment vehicles while risky lending had been moving away from banks to less well-supervised parts of the financial sector.

Meanwhile, the global financial institution warned that China's rapid credit growth, complex financial products and government's implicit guarantee posed threats to financial stability.

According to the International Monetary Fund proposals, China could improve social safety net in order to offset impacts from China's efforts to wind down inefficient corporations.

But it said it did not go along with all of the findings and that the stress tests "do not fully reflect the whole picture".

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