Economy

International Monetary Fund says China's banks need more capital after credit boom

International Monetary Fund says China's banks need more capital after credit boom

The PBOC said under the severely adverse scenario during the stress testing, the common equity tier 1 ratios of the banks whose combined assets account for over 65 percent of the total commercial bank assets in China have remained 7 percent and above, attesting to the strong resilience of the financial system.

"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.

Resolving the problem of "zombie" firms can generate significant GDP gains of 0.7 to 1.2 percentage points per year for China over the next 10 to 15 years, International Monetary Fund research said.

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

"Risks are large", Sahay told reporters during an online briefing.

The report said that regardless of plans to emphasize quality rather than quantity of economic expansion, credit growth is seen by local governments as essential to maintaining employment and social stability and also to supporting infrastructure investment.

"The apparent primary goals of preventing large falls in local jobs and reaching regional growth targets have conflicted with other policy objectives such as financial stability", the report said. China should "incite local governments to strengthen supervision on risks", she added.

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Some of the other major concerns highlighted in the report were the complexity and opacity of the financial system and increasing regulatory arbitrage by financial institutions that use a variety of means to capitalize on loopholes in the system to circumvent controls.

The IMF said: "Given the centrality of banks to the financial system, the FSAP team recommended a gradual and targeted increase in bank capital".

"Regulators should reinforce the primacy of financial stability over development objectives", the fund said.

The IMF pointed out that China's financial regulatory agencies lack independence, have insufficient resources for supervising a large and increasingly complex financial sector, and inadequate interagency coordination and systemic risk analysis.

China will draw on the recommendations, continue to deepen financial sector reform, take concrete steps to contain risks and strengthen cooperation with worldwide organizations, it said.

On its visits to China, the International Monetary Fund conducted stress tests covering 33 banks with 171 trillion yuan ($26 trillion) in total assets and 20 trillion yuan in off-balance sheet WMPS.

The report said Chinese banks, while meeting Basel requirements, should hold more liquid assets and gradually increase their capital to create buffers to absorb potential losses that can be expected during China's economic transition as credit is tightened and assumed guarantees for investors are removed.


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