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China Financial Assets Rise Rapidly, Its Debt Creates Stability Risk – IMF

Unic Press UK: China’s financial system has developed rapidly in size and complexity, emerging as one of the world’s largest with financial assets at circa 470 percent of Gross Domestic Product (GDP); and it facilitates a sharp decline in poverty rates, the International Monetary Fund (IMF) said after a ‘Financial Sector Stability Assessment’.

The report by the Financial Sector Assessment Program (FSAP) mission that visited the People’s Republic of China several times between October 2015 and September 2017, was published in October 2017, and concluded in December 2017 by the IMF Executive Board.

The report illustrates that China’s move towards generating additional GDP growth is the primary reason behind a substantial credit expansion that resulted in corporate debt and household indebtedness rising at a very fast race from a low base.

The IMF Executive Board that concluded the Financial Sector Stability Assessment on People’s Republic of China, said:

“A reluctance among financial institutions to allow retail investors to take losses; the expectation that the government stands behind debt issued by state-owned enterprises and local government financing vehicles; efforts to stabilize stock and bond markets in times of volatility; and protection funds for various financial institutions, have all contributed to moral hazard and excessive risk-taking. The system’s increasing complexity has sown financial stability risks. Given the centrality of banks to the financial system, the FSAP team recommended a gradual and targeted increase
in bank capital. The authorities have recognized these risks, including at the highest level, and are proactively taking important measures to address them. These include the strengthening of systemic risk oversight, further improving regulation, and moving toward functional supervision.” (IMF Press Release No. 17/469: December 6, 2017)

 

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