After the reported slow down in October and the claims of a “soft landing” by China’s economists at APEC, the International Monetary Fund (IMF) warned that China’s banks were susceptible to off-balance sheet lending and a sudden increase in property prices. The report by the IMF was completed in June, but it was not published until this week. Bloomberg reports:
“Despite ongoing reform and financial strength, China confronts a steady buildup of financial sector vulnerabilities,” the Washington-based IMF said in its first formal evaluation of the Chinese system. Banks need to upgrade risk-management systems, the central bank and regulators should add skilled personnel and disclosure standards must be raised, the IMF said.
While a stress test of 17 major commercial banks showed they were resilient to isolated shocks — such as a real-estate slump or a shift in short-term versus long-term interest rates – – a combination of blows at the same time would leave the system “severely impacted,” the fund said. Over the medium term, China is building up “contingent liabilities” from its government-dominated credit allocation model, which could hamper growth.
Today’s report underscores concern that China’s slowing growth and a cooling property market may spark a jump in non- performing loans. The MSCI China/Financials Index of shares has tumbled 23 percent this year, underperforming the broader Shanghai Composite Index of equities, which is down 10 percent.
The Chinese government responded with skepticism towards the IMF report. The Huffington Post adds:
“We have also noticed that the report contains several points of view that are not sufficiently comprehensive and objective,” the People’s Bank of China said in a statement published on its website.
“The government’s sway over financial markets has already evolved from direct intervention to asserting influence through regulation of financial companies,” the central bank said.
It added that China needs to do its own studies to gauge the feasibility of the IMF’s recommendations.
See also: China’s Hu Pledges More Imports to Boost World Growth via CDT.