IMF warns of risks to Chinese banking system
By Louise Ho |
November 16, 2011, Wednesday
|
Print Edition
Print Edition
China should reform its financial system if it is to withstand systemic risks, the International Monetary Fund warned yesterday.
Although China's banks are healthy, Chinese authorities need to address some vulnerabilities, said Jonathan Fiechter, deputy director of the IMF's monetary and capital markets department who headed its first review of China's financial system. "While the existing structure fosters high savings and high levels of liquidity, it also creates the risk of capital misallocation and the formation of bubbles, especially in real estate," he said.
The IMF carried out stress tests on 17 major commercial banks with Chinese regulators in six cities including Shanghai and Beijing.
Banks "appear to be resilient to isolated shocks" such as a fall in real estate prices, exchange rate changes or deterioration in asset quality, the IMF said. "If several of these risks were to occur at the same time, however, the banking system could be severely impacted," it said.
Despite the warning, the IMF said the banking sector's basic liquidity indicators appeared to be "healthy."
The IMF made 29 recommendations. These included broadening financial markets and services, introducing a flexible interest rate and exchange rate system, increasing supervision of Chinese banks and improving risk management systems.
China could reduce its banking risks by making the industry more market-oriented and reducing the government's dominant role in making lending decisions, the IMF said.
China's banks are seen as among the world's strongest after they avoided the credit problems that battered Western institutions. But industry analysts say they face a possible rise in bad loans due to heavy lending during the financial crisis.
China's banks could face risks if real estate prices fall sharply or unpaid loans increase due to crisis-related lending, the IMF said.
Other dangers could arise from growing imbalances in a Chinese economy that relies heavily on exports and investment to drive growth.
The IMF said the government should reduce its use of banks to carry out economic plans and instead pay for initiatives out of the government budget. The agency also recommended further development of financial markets to make credit more available to entrepreneurs and for regulators to improve their ability to monitor banks and spot problems.
The People's Bank of China said the IMF report was generally objective and constructive. However, it said some of the recommendations needed further study.
"Market mechanisms are playing a basic role in forming China's interest rates and exchange rate, and China should take a flexible approach to financial reform based on its own conditions," it said.
Lu Ting, China economist with Bank of America Merrill Lynch, said a major problem with China's system was over-lending to state-owned enterprises and local governments.
Although China's banks are healthy, Chinese authorities need to address some vulnerabilities, said Jonathan Fiechter, deputy director of the IMF's monetary and capital markets department who headed its first review of China's financial system. "While the existing structure fosters high savings and high levels of liquidity, it also creates the risk of capital misallocation and the formation of bubbles, especially in real estate," he said.
The IMF carried out stress tests on 17 major commercial banks with Chinese regulators in six cities including Shanghai and Beijing.
Banks "appear to be resilient to isolated shocks" such as a fall in real estate prices, exchange rate changes or deterioration in asset quality, the IMF said. "If several of these risks were to occur at the same time, however, the banking system could be severely impacted," it said.
Despite the warning, the IMF said the banking sector's basic liquidity indicators appeared to be "healthy."
The IMF made 29 recommendations. These included broadening financial markets and services, introducing a flexible interest rate and exchange rate system, increasing supervision of Chinese banks and improving risk management systems.
China could reduce its banking risks by making the industry more market-oriented and reducing the government's dominant role in making lending decisions, the IMF said.
China's banks are seen as among the world's strongest after they avoided the credit problems that battered Western institutions. But industry analysts say they face a possible rise in bad loans due to heavy lending during the financial crisis.
China's banks could face risks if real estate prices fall sharply or unpaid loans increase due to crisis-related lending, the IMF said.
Other dangers could arise from growing imbalances in a Chinese economy that relies heavily on exports and investment to drive growth.
The IMF said the government should reduce its use of banks to carry out economic plans and instead pay for initiatives out of the government budget. The agency also recommended further development of financial markets to make credit more available to entrepreneurs and for regulators to improve their ability to monitor banks and spot problems.
The People's Bank of China said the IMF report was generally objective and constructive. However, it said some of the recommendations needed further study.
"Market mechanisms are playing a basic role in forming China's interest rates and exchange rate, and China should take a flexible approach to financial reform based on its own conditions," it said.
Lu Ting, China economist with Bank of America Merrill Lynch, said a major problem with China's system was over-lending to state-owned enterprises and local governments.
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