IMF Executive Board Concludes Financial Sector Stability Assessment with China
IMF News, December 7, 2017
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Bibliographic details
- Published: December 7, 2017
Background and scope
- Press Release No. 17/469; discussion by the IMF Executive Board took place on November 10, 2017.
- The assessment is the Financial System Stability Assessment (FSSA) of the People’s Republic of China, an output of the Financial Sector Assessment Program (FSAP).
- Since the 2011 Financial Sector Assessment Program (FSAP), China’s financial system has expanded rapidly and is now described as one of the world’s largest with financial assets at nearly 470 percent of GDP.
Key findings on financial system developments
- Rapid expansion in size and complexity of the financial system accompanying continued impressive economic growth since 2011.
- Monetary and fiscal policies in recent years have been expansionary to support employment and growth, creating pressures to keep non-viable firms open—particularly at the local government level—sometimes in conflict with financial stability.
- Substantial credit expansion to generate additional GDP growth has resulted in:
- High corporate debt.
- Household indebtedness rising at a fast pace, albeit from a low base.
- Demand for high-yield investment products and stronger bank oversight have prompted regulatory arbitrage and growth of increasingly complex investment vehicles.
- Risky lending has shifted away from banks toward less-well-supervised parts of the financial system.
- Non-bank financial institutions, including asset managers and insurance companies, have grown even faster than the banking sector and offer a proliferation of investment products.
- Banks remain central in a highly interconnected system of indirect lending, with uncertain linkages among numerous institutions posing supervisory challenges.
- Widespread implicit guarantees have increased moral hazard and excessive risk-taking. Examples include:
- Reluctance among financial institutions to allow retail investors to take losses.
- Expectations that the government stands behind debt issued by state-owned enterprises and local government financing vehicles.
- Efforts to stabilize stock and bond markets in times of volatility.
- Protection funds for various financial institutions.
Risks and transmission channels
- Increasing system complexity has sown financial stability risks, with key channels including:
- Credit overhang stemming from policy trade-offs between growth/employment and financial stability.
- Shadow banking and the movement of risky lending into less-regulated entities and products.
- Implicit guarantees that weaken market discipline and encourage excessive risk-taking.
- Interconnectedness centered on banks complicating the assessment of contingent liabilities and systemic exposures.
- Supervisory and data challenges:
- Need for strengthened systemic risk analysis and oversight.
- Data quality and collection shortcomings and limited information sharing across agencies.
Executive Board assessment and recommendations
- Executive Directors broadly agreed with the FSSA’s findings and recommendations.
- Directors welcomed steps taken by the People’s Bank of China and regulatory agencies, including:
- Introduction of Basel III standards.
- A risk‑oriented solvency standard for insurers.
- Improved oversight of securities market products.
- Directors encouraged implementation of the FSSA recommendations to strengthen:
- Systemic risk analysis and oversight.
- Data quality, collection, and interagency information sharing.
- Specific governance, supervisory, and policy recommendations:
- Align incentives at national and regional levels to prioritize financial stability over smoothing adjustment costs (e.g., maintaining GDP growth and protecting employment).
- Enhance supervision of financial conglomerates and sequence reforms to reduce implicit guarantees, including for financial institutions and state‑owned enterprises.
- Ensure credible loan classification and uniform treatment of similar financial market products.
- Strengthen legal protection, clarify institutional mandates, and ensure accountability to provide independence and resources for oversight agencies and foster interagency cooperation.
- Prioritize financial stability at agency and cross‑sectoral levels, including in the proposed Financial Stability Sub‑Committee, to monitor risks outside the regulatory perimeter.
- Increase emphasis on functional supervision in addition to the current institution‑based approach.
- Strengthen the financial safety net and the legal framework for bank resolution to improve incentives and reduce potential risks to public resources from financial institution failures.
- Further develop the oversight framework for digital finance to balance innovation with safety and soundness, given the significant expansion of fintech and its benefits for financial inclusion.
- Continue efforts to overcome remaining deficiencies in the AML/CFT framework and align it with the revised Financial Action Task Force standard.
Authorities’ actions noted
- Authorities have recognized the identified risks, including at the highest level, and are proactively taking measures such as:
- Strengthening systemic risk oversight.
- Further improving regulation.
- Moving toward functional supervision.
- The FSSA team recommended a gradual and targeted increase in bank capital, given the centrality of banks in the system.
Source: IMF Press Release No. 17/469, December 6, 2017.
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References
- China: Financial System Stability Assessment-Press Release and Statement by the Executive Director
- China: Detailed Assessment Report on the Observance of Standards and Codes
- Blog: Improving Financial Stability in China
- https://www.imf.org/en/countries/infographics/china/2017/fsap
- People's Republic of China and the IMF
- Financial Sector Assessment Program (FSAP)
- Press Releases
- PRESS CENTER
- http://www.imf.org/external/np/sec/misc/qualifiers.htm
- https://www.imf.org/en/home