Press Release: IMF Calls for Further Reforms in China's Financial System

IMF News, November 14, 2011

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Press Release No. 11/409
Date: November 14, 2011
The IMF's first Financial Sector Assessment Program (FSAP) review of China, carried out jointly with the World Bank, finds that China’s financial system is robust overall but faces a steady build-up in vulnerabilities.
The FSAP is part of the IMF’s financial surveillance and monitoring of the international monetary system; FSAPs are mandatory at least once every five years for systemically important countries.

Medium-term vulnerabilities are building and could impair the needed reorientation of the financial system to support future growth.
Moving toward a reoriented financial system will pose additional risks, making it a priority to establish institutional and operational preconditions for wide-ranging financial reform.

Steps to broaden financial markets and services, and develop diversified modalities of financial intermediation that would foster healthy competition among banks.
Reorientation of the role of government away from using the banking system to carry out broad government policy goals and to allow lending decisions to be based on commercial goals.
Expansion of the use of market-based monetary policy instruments, using interest rates as the main instrument to govern credit expansion, rather than administrative measures.
Upgrading of financial infrastructure and legal frameworks, including strengthening the payments and settlement systems, consumer protection, and expansion of financial literacy.

Stress tests conducted jointly by the Fund and Chinese authorities of the country’s largest 17 commercial banks indicate that most of them appear to be resilient to isolated shocks, including: a sharp deterioration in asset quality (including a correction in the real estate markets), shifts in the yield curve, and changes in the exchange rate.
If several of these risks were to occur at the same time, the banking system could be severely impacted.

The Chinese authorities have begun to move on many of the IMF’s recommendations.
The IMF stands ready to provide technical cooperation in areas relating to strengthening the financial stability framework in China.

The Financial Sector Assessment Program, established in 1999, is an in-depth analysis of a country’s financial sector.
The IMF conducts mandatory FSAPs for the 25 jurisdictions with systemically important financial sectors, and any member countries that request it.
Assessments in developing and emerging market countries are conducted jointly with the World Bank.
FSAPs include two components: a financial stability assessment (the responsibility of the Fund) and, in developing and emerging market countries, a financial development assessment (conducted by the World Bank).
In September 2010, the IMF made financial stability assessments under the FSAP a mandatory part of IMF surveillance every five years for jurisdictions deemed systemically important.
Countries listed as affected by that decision include: Australia, Austria, Belgium, Brazil, Canada, China, France, Germany, Hong Kong SAR, Italy, Japan, India, Ireland, Luxembourg, Mexico, the Netherlands, Russia, Singapore, South Korea, Spain, Sweden, Switzerland, Turkey, the United Kingdom, and the United States.
For more information on FSAPs, see Press Release No. 10/357.

Source: Press Release No. 11/409, November 14, 2011, International Monetary Fund.