China is doing fine for now, but its financial systems need urgent attention as risks — esoterically called “vulnerabilities” — are piling up outside the door, the International Monetary Fund (IMF) said in a report on Monday.
While commending on its “commercially-oriented financial sector,” the IMF said, “risks stem from the growing complexity of the system and the uncertainties surrounding the global economy.”
India offered itself for the review in January 2011. It could not be ascertained if the process had yet to start or is under way. This is a voluntary review, conducted with the full cooperation of the country under assessment.
“China’s banks and financial sector are healthy, but there are vulnerabilities that should be addressed by the authorities,” said Jonathan Fiechter, head of the IMF team that conducted the FSAP.
“While the existing structure fosters high savings and high levels of liquidity, it also creates the risk of capital misallocation and the formation of bubbles, especially in real estate.”
US President Barack Obama had recently urged China to behave as a grown-up economy at the conclusion of the APEC meeting in Hawaii.
IMF was less combative, but its message was clear: bring more reforms. Its list of risks: deterioration in loan quality due to rapid credit expansion, growing disintermediation by shadow banks and off-balance sheet exposures, a downturn in real estate prices, and the uncertainties of the global economic scenario.
“Medium-term vulnerabilities are also building,” the report added, “and could impair the needed reorientation of the financial system to support the country’s future growth. Moving along this path will pose additional risks.”
The IMF said China had already embarked upon some of the suggestions, and for the rest the fund is ready to offer any assistance needed.
The report added that China needs to do its own studies to gauge the feasibility of the IMF's recommendations.