Economy

China's debt levels pose stability risk, says International Monetary Fund

China's central bank Thursday expressed its confidence about the country's financial system stability, after the International Monetary Fund (IMF) and World Bank pointed out potential risks in the system in several assessment reports.

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.

"Overall, the reports have presented professional and valuable assessments of China's financial system and its recommendations are highly relevant in the context of deepening financial reform in China", the PBOC said.

China should prioritize financial stability above development goals, as pursuit of regional growth targets and helping firms avoid heavy job losses have led to a surge in debt, particularly at local government level, the International Monetary Fund said.

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

Speculation has grown that the government may lower the annual GDP growth target or abandon it altogether after President Xi Jinping stopped short of following his predecessors in setting a long-term economic expansion target at the twice-a-decade National Party Congress in October.

The tensions identified include China's rapid build-up of credit and risky lending moving away from banks toward less-regulated parts of the financial system, while implicit guarantees added to these risks. This encourages excessive risk-taking by households, companies, local governments and financial institutions, it said.

But the near-term prioritization of social stability seems to depend on credit growth to sustain financing to firms even when they are non-viable, it said.

China announced the establishment of a Financial Stability and Development Committee (FSDC) in July, reporting directly to the State Council and chaired by Vice Premier Ma Kai, to strengthen supervision of the financial system, prevent system risks and formulate new laws and regulations to provide one unified regulatory framework.

Increasing capital would enhance the resilience and credibility of the financial system, as well as reassure markets.

The People's Bank of China reacted swiftly to the report's release, saying that while the report is objective and pertinent, the assessment "does not give the whole picture".

The fund said that Chinese financial institutions are seemingly unwilling to allow investors to lose money and that this has created an environment where investors are simply taking more and more risk, lacking the fear that they'll ever actually see a downside.

"The descriptions of the stress testing did not fully reflect the outcomes of the test", it said on its website.

The International Monetary Fund has urged China's banks to raise more capital to protect against risks caused by a credit boom.



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