IMF Says Current Circumstances In China Warrant Additional Bank Capital

07 December, 2017, 22:46 | Author: Regina Silva

China is the second largest economy in the world and is forecasted to become the world's biggest importer in the next 5 years - overtaking the US.

The report said China should put less emphasis on targets for growth, which led to excessive credit expansion and higher levels of debt at local level; that it should beef up financial supervision and put increased emphasis on spotting risks ahead; and that it should gradually increase the amount of capital targeted banks should hold.

The IMF's health check of China's financial system found that credit was high by global 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.

It added that 27 out of the 33 banks tested - three-quarters of China's banking system assets - were "undercapitalized relative to at least one of the minimum requirements". It urged Beijing to halt credit-fueled growth and bulk up on banks' capital reserves. Corporate debt was now at 165 percent of GDP, the report said, while household debt had also risen quickly over the past few years.

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

Further, IMF said the credit to GDP ratio is very high by global comparison, and above levels consistent with a high probability of financial distress.

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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".

China's loss-making often state-owned firms have come to be known as "zombie" companies and banks and investors fund many of them as if they would not be allowed to fail.

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. Local government leaders were aiming to maintain high employment "even if that means cash-bleeding enterprises continue to operate". "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.

The IMF said the impact of the shocks is highly uneven across banks.

The IMF warned in October that China's dependence on debt was growing at a "dangerous pace".

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