## Improving Financial Stability in China

_IMF Blog, December 7, 2017_

## Source details

**Canonical URL:** [Improving Financial Stability in China](https://www.imf.org/en/blogs/articles/2017/12/07/improving-financial-stability-in-china)

## Other formats

- [Markdown version](/en/blogs/articles/2017/12/07/improving-financial-stability-in-china/index.md)
- [Structured JSON version](/en/blogs/articles/2017/12/07/improving-financial-stability-in-china/index.json)
- [Bundle manifest](/en/blogs/articles/2017/12/07/improving-financial-stability-in-china/bundle-manifest.json)

## Bibliographic details
- Authors: Ratna Sahay, James P Walsh
- Published: December 7, 2017

---

### Overview
- Authors: Ratna Sahay, James P. Walsh
- Publication date: December 7, 2017 (page shows December 6, 2017 as well)
- Context: Results from the IMF's Financial Sector Assessment Program (FSAP) review of China.
- Key framing: China is transitioning from the “world’s factory floor” toward a more modern, consumer-driven economy. The financial system permeates virtually all aspects of economic activity and played a key role in facilitating rapid economic growth and sharply reducing poverty rates.
- Systemic importance noted: China has the world’s largest banks and second-largest stock market.

### Three concerns identified by the FSAP
- Lending boom
  - Sustained rapid credit growth despite the slowing economy, driven by a focus on maintaining growth and employment.
  - Debt is largely owed by companies—some of which may not have good prospects—and local governments, with an increasing share owed by households.
  - Note: “Credit growth is an important indicator of future financial distress, because lending standards often fall in the rush to make more loans.”
- Complexity
  - Rules on bank lending to traditional sectors (such as construction and real estate) have pushed risky borrowers away from banks toward more lightly regulated financial products.
  - Banks are offering increasingly complex wealth management products to savers seeking higher-yielding assets.
- Guarantees
  - Banks often compensate investors for losses on financial products to preserve reputations; the government has repeatedly intervened to stabilize financial markets; investors expect state-owned enterprises will be bailed out.
  - Implicit guarantees encourage underestimation of risk and can lead to misallocation of investment to less productive activities.

### Systemic monitoring and political economy constraints
- The interaction of the three concerns has created a highly dynamic, fast-moving financial system that is difficult to monitor.
- Removing implicit guarantees is particularly challenging because it involves allowing markets to fall, firms to fail, and investors to lose money.
- Complementary measures needed: better social safety nets, financial education, and improved bankruptcy procedures.
- Fiscal/political constraints: 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 and recent policy actions
- 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.
- Since the last assessment in 2011, supervision of banks, insurance companies, and securities firms has been continuously improved.
- Authorities 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.

### IMF’s main recommendations (five key areas)
- Systemic risk monitoring
  - Create a body focused solely on financial stability to improve oversight of systemic risk.
  - The body should regularly discuss and assess issues on a cross-agency basis and make recommendations to implementing supervisors.
  - Improving the quality of data is important for effective monitoring.
- Interagency coordination and supervisory independence
  - Financial supervisors need greater independence to pursue mandates without concern about being overruled.
  - Supervisors need more resources to adequately supervise a large and complex system.
  - Better coordination is essential at all levels, not just at the top, to identify and manage risks.
- Bank capital
  - Gradually increase capital at banks to cushion against a sudden cyclical economic downturn, given the large size of the credit boom.
  - Higher buffers are recommended at several large banks to prevent shocks from spreading across the financial system.
  - China-specific risks (lifting implicit guarantees and large off-balance sheet exposures historically guaranteed by banks) call for higher levels of capital across the system during the transition.
- Liquidity buffers and interbank lending
  - Banks and financial institutions are increasingly using very short-term borrowing to finance investments.
  - To contain risks if those flows reverse, banks should hold more liquid assets.
  - Rules on lending among financial institutions should be amended to encourage safer, longer-term lending.
- Crisis management and resolution
  - Several elements of an effective crisis-management framework are already in place.
  - Further reforms needed to reduce reliance on public funds in managing weak financial institutions while ensuring they can fail safely.
  - Specific recommendation: expand administrative resolution powers in line with international standards.

### Challenges and concluding observations
- Supervising one of the world’s largest and most complicated systems is a challenging task; many gaps remain despite substantial progress.
- Addressing the identified concerns should help China continue to grow both rapidly and safely.

*Source: Improving Financial Stability in China, Ratna Sahay and James P. Walsh, December 7, 2017.*

---

## Content in this bundle

- **China Financial Stability**
  - [China Financial Stability (PDF)](/external/arabic/np/blog/2017/CHINA-Financial-Stability.pdf){rel="external" type="text/html; charset=utf-8"}
- **中国での金融安定性強化; ラトナ・サヘイ ジェームス P. ウォルシュ IMF ブログ 2017年12月6日掲載**
  - [中国での金融安定性強化; ラトナ・サヘイ ジェームス P. ウォルシュ IMF ブログ 2017年12月6日掲載 (Markdown version)](/external/japanese/np/blog/2017/120617j.pdf.md){rel="alternate" type="text/markdown"}
  - [中国での金融安定性強化; ラトナ・サヘイ ジェームス P. ウォルシュ IMF ブログ 2017年12月6日掲載 (PDF)](/external/japanese/np/blog/2017/120617j.pdf){rel="external" type="application/pdf"}
- **Укрепление финансовой стабильности в Китае**
  - [Укрепление финансовой стабильности в Китае (Markdown version)](/external/russian/np/blog/2017/120617r.pdf.md){rel="alternate" type="text/markdown"}
  - [Укрепление финансовой стабильности в Китае (PDF)](/external/russian/np/blog/2017/120617r.pdf){rel="external" type="application/pdf"}
- **Mejorar la estabilidad financiera en China**
  - [Mejorar la estabilidad financiera en China (Markdown version)](/external/spanish/np/blog/2017/120617s.pdf.md){rel="alternate" type="text/markdown"}
  - [Mejorar la estabilidad financiera en China (PDF)](/external/spanish/np/blog/2017/120617s.pdf){rel="external" type="application/pdf"}

---

## References

- [https://www.imf.org/wp-content/uploads/2017/12/BLOG-1024x600-China-man-walking-past-bank-Stephen-Shaver-Newscom-upiphot....jpg](https://www.imf.org/wp-content/uploads/2017/12/BLOG-1024x600-China-man-walking-past-bank-Stephen-Shaver-Newscom-upiphot....jpg)
- [latest evaluation](http://www.imf.org/en/Publications/CR/Issues/2017/12/07/people-republic-of-china-financial-system-stability-assessment-45445)
- [Financial Sector Assessment Program](http://www.imf.org/external/np/fsap/fssa.aspx)
- [https://www.imf.org/wp-content/uploads/2017/12/ENG_Nov_30China_FSAP-6.jpg](https://www.imf.org/wp-content/uploads/2017/12/ENG_Nov_30China_FSAP-6.jpg)
- [China’s](http://www.imf.org/en/Countries/CHN)

_Source: https://www.imf.org/en/blogs/articles/2017/12/07/improving-financial-stability-in-china_