BEIJING – The International Monetary Fund urged China on Thursday to increase the risk monitoring system in its financial sector, one of the world’s largest, while also recommending a gradual increase in capital to offset a potential downturn due to the country’s credit boom.
In the report “Financial System Stability Assessment,” the IMF warned that even though there has been an expansion in employment and growth, the country’s financial system has also seen higher corporate and household debt, as “the credit needed to generate additional GDP growth has led to a substantial credit expansion,” that is in conflict with financial stability.
The banking system also faces risks as demand for high-yield investment coupled with the system oversight led to the “risky lending” in the “less-well-supervised parts of the financial system.”
The report says the Chinese authorities should not focus on local-level economic demand that seeks to promote employment at any cost, but should prioritize quality over quantity in growth.
Ratna Sahay, deputy director of the IMF Monetary and Capital Markets Department, said Wednesday that these factors have created a “highly dynamic and fast-moving financial system” that is very difficult to monitor and called for “better social safety nets, financial education, and improved bankruptcy procedures.”
The IMF proposed that the Chinese banking system should carry out reforms that include a systemic risk monitoring, the stabilization of its capital and liquidity and the strengthening of its crisis management plan.
The Bank of China issued a statement Wednesday defending the stability of its financial system and explaining that, although the IMF has acknowledged the advances made by China through its recent economic reforms, it disagreed with some of the international organization’s conclusions.
“The descriptions of the stress testing did not fully reflect the outcomes of the test,” according to the central bank.