A rise in off-balance sheet liabilities and a house price boom have left Chinese banks vulnerable to heavy losses, the International Monetary Fund has said. In a wide-ranging report on the Chinese financial system, the IMF said it was facing a “steady build-up of financial sector vulnerabilities”.
“The system is becoming more complex and inter-linkages between markets, institutions and across international borders are growing. In addition, informal credit markets, conglomerate structures and off-balance sheet activities are on the rise,” the IMF warned on Tuesday.
The government’s role in allocating credit, as well as its broader economic policy, was leading to a build-up in contingent liabilities, the IMF added, but it was difficult to quantify the risks, given the paucity of data.
Stress tests on the country’s 17 largest banks showed that they were resilient to one-off shocks: “If several of these risks were to occur at the same time, however, the banking system could be severely impacted.”
The evaluation is the first time that the IMF has reviewed the Chinese banking system.
The report recommended that the Chinese government intervene less to keep down the value of the yuan, use interest rates rather than administrative limits to control credit demand, and allow banks to make commercial decisions on lending.
“Banks’ large exposure to state-owned enterprises, guaranteed margins provided by interest rate regulations, the still limited ability and willingness to differentiate loan rates, coupled with the implicit guidance on the pace and direction of new lending, undermine the development of effective credit risk management in the banks. It is important that banks have the tools and incentives to make lending decisions based on purely commercial goals.”
In response to the report, the central bank, People’s Bank of China, said: “Although the assessment in the reports is, overall, objective and positive, and the recommendations on the future reforms are constructive, a few points are not sufficiently well rounded or objective, and the time frame and suggested priorities of some proposed reform measures need to be further analysed.”
In particular, the bank said, China had already moved away from administrative quotas on credit and towards an interest-rate based monetary policy. —