IMF Says Current Circumstances In China Warrant Additional Bank Capital

Lloyd Doyle
December 7, 2017

An nearly two-year long study by the International Monetary Fund found three major tensions that could derail the world's second-largest economy. "Reducing excessive credit expansion and debt overhang will require de-emphasizing high GDP projections in national plans that motivate setting high growth targets at the local level".

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.

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.

The result is "moral hazard and excessive risk-taking", the IMF's Financial Sector Assessment Program (FSAP) team said.

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

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

The IMF specifically warned that the rapid development of financial products for investors could pose grave risks.

China will draw on the recommendations, continue to deepen financial sector reform, take concrete steps to contain risks and strengthen cooperation with global organizations, it said. "Better coordination among supervisors is therefore essential to make sure that these risks are contained, and that everyone understands what the risks to these products are", he said.

Meanwhile, corporate profitability has improved this year, and local government borrowing has been backed by long-term cash-generating assets, making very limited room for any underestimation of NPL ratio, the central bank said.

"In terms of resources, the CBRC as with the other supervisory agencies under (PBOC) have been working with a headcount that hasn't changed in 10 years, a period in which the Chinese financial sector has more than doubled in size", Piris told reporters.

According to the stress test conducted among 33 banks, 27 banks were under-capitalized.

But the International Monetary Fund said a more-effective macroprudential policymaking structure was needed, and to ensure the FSDC made well-informed decisions, a Financial Stability Sub-Committee should be set up, composed of the People's Bank of China (PBOC) and the banking, securities and insurance watchdogs, to take on the sole mandate of ensuring financial stability.

In a report, released Wednesday, the Washington-based lender said buffer capital would help to absorb potential losses.

"China's central bank said it disagreed with "a few descriptions and views" in the report".

Other reports by Iphone Fresh

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