IMF warns over ‘large risks’ for China’s financial system

The growing debt dependency at a “dangerous pace” by the world’s second-biggest economy, China, has raised International Monetary Fund (IMF) concerns. The fund has warned of large risks and imbalances.

According to the IMF's health check of China’s financial system, four-fifths of the country’s banks are at risk. China's “big four” banks had adequate capital, but “large, medium and city-commercial banks appear vulnerable,” it said.

The system’s increasing complexity has sown financial stability risks, the IMF’s assessment said. “Credit growth has outpaced GDP growth, leading to a large credit overhang."

The country’s debt is now equivalent to 234 percent of the country's total output, the IMF report showed.

"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 IMF has acknowledged that President Xi Jinping is taking steps to contain the risks and is committed to improving financial security. It added Beijing should adjust its economic strategy further and create a body to focus solely on financial stability.

"Supervising one of the world's largest and most complicated systems is a challenging task. The Chinese authorities have worked hard to keep pace with growth and innovation, but as in all countries, many gaps remain," the IMF said.

“We recommend the authorities to de-emphasize the GDP” growth, said Ratna Sahay, deputy director of the IMF's Monetary and Capital Markets Department.

She added that "implicit guarantees to SOEs [state-owned enterprises] need to be removed carefully and gradually.”

The IMF has also warned against the rapid development of new financial products, which it said could "very rapidly become large and popular and potentially a systemic risk."