AFP / Paul J. RICHARDS
The International Monetary Fund report polls the stability of China’s financial system
The International Monetary Fund on Thursday warned of the dangers of financial crises. The IMF reports a day after regulators in Beijing, and a number of alerts about a ballooning debt problem in the world’s number-two economy.
China, the financial market, is one of the world’s largest debtors. China has largely relied on debt-fueled growth and exports to its tremendous economic growth, but the Fund said this model has reached its limits. Part of the problem lies in high growth targets, the IMF said, which encourages local governments to extend credit and protect failing companies. “We recommend the authorities to de-emphasize the GDP (growth),” Ratna Sahay, deputy director of the IMF’s Monetary and Capital Markets Department, said during a news conference. China should “urge local governments to strengthen supervision on risks”, she added. Abundant credit allows local governments to hit the bottom of the world. The ballooning debt – estimated at 234 percent of gross domestic product by the IMF – China’s future economic growth. “Credit growth is an important indicator of future financial distress, because lending standards often fall into the rush to make more loans,” IMF experts warned in a blog post. – Zombie companies – The Fund’s experts carried out stress tests on dozens of banks. China’s big four banks had adequate capital “broad, medium, and city-commercial banks seem vulnerable,” the IMF said. It added that 27 out of the 33 banks tested – accounting for three-quarters of China’s banking system assets – were “undercapitalised relative to at least one of the minimum requirements”. While the country’s banking system meets the requirements of global banking rules known as Basel III, “the situation conditions warrant a capital increase”, the report said. “This would create a buffer to absorb potential losses that can be expected during the economic transition and have been removed.” China’s central bank said it disagreed with “a few descriptions and views” in the report. “The descriptions of the stress testing did not fully reflect the outcome of the test,” the People’s Bank of China said on its website. The China Banking Regulatory Commission on Wednesday released a draft of fresh rules to tackle related issues. The latest regulations call for new indicators to monitor commercial banks’ liquidity and related requirements. They will “strengthen management of liquidity risk for banks and protect the safety and stability of the banking system”, the commission said. In some cases local banks to the extent of maintaining the financial position of the company, to maintain the position of the government and to maintain the business of business. These loss-making firms, often state-owned, have come to be known as zombie companies, and banks and investors fund many of them as they will not be allowed to fail. “Implicit guarantees and the government’s desire to support growth encourages these firms to invest excessively, raising already-high leverage while weakening performance on profitability and debt service capacity,” the Fund wrote in a recent report. In October, it warned China’s dependence on debt is growing at a “dangerous pace” and needed to act to warn a crisis. That came weeks after the Bank for International Settlements – said the banking sector could be facing an impending blowout, raising worries about its effect on the world economy. The IMF’s latest assessment of financial engineering helped banks obscure the potential losses. “Implicit guarantees to SOEs (state-owned enterprises) need to be removed carefully and gradually,” Sahay said. “It would be wise to have a high-level committee to monitor the risks across all sectors.”

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