IMF says China's banks need more capital after credit boom

The IMF said China’s growth has been supported by a financial system that is increasingly complex and lacks rigour. It listed a series of risks that had built up since its last report in 2011 including high levels of debt, too many zombie companies and a growing “shadow banking” sector.

Risks are particularly high at a local level where pressures to keep non-viable businesses afloat are strong and conflict with financial stability, the IMF said. China’s short-term goal of maintaining social stability is at odds with a longer term need to protect financial stability, it added.

Financial institutions have been reluctant to let retail investors suffer losses, the authorities have stepped in to shore up stock and bond markets and investors believe the government stands behind debt issued by local government and state-owned enterprises, the IMF said.

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

The IMF said: “Given the centrality of banks to the financial system, the FSAP team recommended a gradual and targeted increase in bank capital. The authorities have recognised these risks, including at the highest level, and are proactively taking important measures to address them.”

Curbing excessive credit growth will require less emphasis on GDP projections in national plans that have spurred local governments to set high growth targets, the IMF said. The IMF recommended China form a financial stability sub-committee comprising the central bank and regulatory agencies and provide more staff for the banking regulator.

People’s Bank of China, the country’s central bank, said the IMF report was objective and relevant but that it did not paint a full picture and the financial system was able to fend off risks.