Improving Financial Stability in China

December 6, 2017

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[caption id="attachment_22044" align="alignnone" width="1024"] A man walks past a bank branch in Beijing: China’s leaders have made financial stability one of their top priorities (photo: Stephen Shaver/UPI/Newscom).[/caption]

China’s leaders have made financial stability one of their top priorities. Given the size and importance of the Chinese market, with the world’s largest banks and second-largest stock market, that is welcome news for China and the world. The financial system permeates virtually all aspects of economic activity, having played a key role in facilitating rapid economic growth and in sharply reducing poverty rates.

China is moving from the world’s factory floor toward  a more modern, consumer-driven economy. During this transition, however, some tensions have emerged in the financial sector.

Three concerns

The IMF recently concluded its latest evaluation for China under the IMF's Financial Sector Assessment Program (FSAP). The assessment identifies three important and interconnected concerns about the Chinese financial system:

Taken together, these factors have created a highly dynamic and fast-moving financial system that is very difficult to monitor. Removing implicit guarantees—allowing markets to fall, firms to fail, and investors to lose money—is particularly challenging. Better social safety nets, financial education, and improved bankruptcy procedures will help. But credit growth will not slow sustainably unless tolerance for job losses and slower economic growth rises, particularly at local level, and new sources of revenue are found for local governments.Key goal

China’s authorities recognize these risks and are seeking to contain them. President Xi in April cited financial stability as a key goal for China. And since the last assessment in 2011, the Chinese authorities have continuously improved supervision of banks, insurance companies, and securities firms.

The IMF’s main recommendations for further improvement are in five key areas: systemic risk monitoring, interagency coordination, bank capital, liquidity buffers, and crisis management. Let’s take a closer look at the recommendations in each area:

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. They recently created a Financial Stability and Development Committee to monitor systemic risks and prevent financial disruptions and announced new rules to contain riskiness of asset management products. Addressing such concerns should help China continue to grow both rapidly and safely.