Fri, Dec 08, 2017 - Page 10 News List

IMF eyes risks brewing in China

BALLOONING DEBT:The IMF said Beijing’s model of driving economic growth via debt-fueled investment and exports and of emphasizing high-growth targets has reached its limits

AFP, BEIJING

The IMF yesterday warned of brewing risks in China’s banking system as it found dozens of crucial lenders needed to beef up their protection against possible financial crises.

The report comes a day after regulators in Beijing drafted new rules to strengthen bank funding and follows a number of alerts about a ballooning debt problem in the world’s No. 2 economy.

Near the top of the list in the IMF study scrutinizing the stability of China’s financial system is the need for banks to increase their capital to ward off risks from mounting debt.

China has largely relied on debt-fueled investment and exports to drive its tremendous economic growth, but the IMF said this model has reached its limits.

Part of the problem lies in high-growth targets, the IMF said, which incentivize local governments to extend credit and protect failing companies.

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“We recommend that the authorities de-emphasize GDP” growth, IMF Monetary and Capital Markets Department deputy director Ratna Sahay said during a news conference, adding that China should “incite local governments to strengthen supervision on risks.”

The ballooning debt — estimated at 234 percent of GDP by the IMF — adds financial risk and might weigh on China’s future economic growth.

“Credit growth is an important indicator of future financial distress, because lending standards often fall in the rush to make more loans,” IMF experts said in a blog post.

The fund’s experts carried out stress tests on dozens of banks.

China’s big four banks had adequate capital but “large, medium, and city-sized commercial banks appear vulnerable,” the IMF said.

Twenty-seven out of 33 banks tested, accounting for three-quarters of China’s banking system assets, were “undercapitalized relative to at least one of the minimum requirements,” it added.

The China Banking Regulatory Commission on Wednesday released a draft of fresh rules to tackle those issues.

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The latest regulations call for new indicators to monitor commercial banks’ liquidity and set related requirements.

They will “strengthen management of liquidity risk for banks and protect the safety and stability of the banking system,” the commission said.

In some cases local banks face pressure to lend to politically important companies, as local governments aim to maintain high employment even if that means cash-bleeding enterprises continue to operate.

These loss-making firms, often state-owned, have come to be known as “zombie companies,” and banks and investors fund many of them as if they will not be allowed to fail.

“Implicit guarantees and the government’s desire to support growth encourage these firms to invest excessively, raising already-high leverage while weakening performance on profitability and debt service capacity,” the fund wrote in a recent report.

The IMF’s warning came weeks after the Bank for International Settlements said the banking sector could be facing an imminent blowout, raising worries about its effect on the world economy.

The IMF’s latest assessment said financial engineering helped banks obscure the potential losses.

“Implicit guarantees to SOEs [state-owned enterprises] need to be removed carefully and gradually,” Sahay said. “It would be wise to have a high-level committee to monitor the risks across all sectors.”

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