This financial sector stability assessment on the People’s Republic of China was prepared by a staff team of the International Monetary Fund as background documentation for the periodic consultation with the member country. It is based on the information available at the time it was completed on June 24, 2011. The views expressed in this document are those of the staff team and do not necessarily reflect the views of the government of the People’s Republic of China or the Executive Board of the IMF.
This report is based on the IMF/World Bank Financial Sector Assessment Program (FSAP) exercise for China undertaken during June–December 2010. The assessment concluded that reforms have progressed well in moving to a more commercially-oriented financial system. Despite success and rapid growth, China’s financial sector is confronting several near-term risks, structural challenges, and policy-induced distortions.
The main sources of risks are:
(i) the effects of a rapid crisis-related credit expansion on credit quality,
(ii) growing off-balance sheet exposures and disintermediation,
(iii) a reversal in rapidly rising real estate prices, and
(iv) an increase in imbalances due to the current economic growth pattern. Medium-term vulnerabilities—the relatively inflexible macroeconomic policy framework, and the government’s important role in credit allocation and in the financial sector at the central and provincial levels—are building up contingent liabilities and could impair the needed reorientation of the financial system to support China’s future growth. A properly composed and timely implemented set of reforms would help address these challenges.
This will require further progress in multiple areas, including
(i) deepening the commercial orientation of banks and other financial firms;
(ii) moving to more market-based means of influencing monetary and financial conditions;
(iii) continued strengthening o he capacity of the central bank on financial stability issues, and that of the supervisory commissions;
(iv) further development of financial markets and instruments to deepen and strengthen China’s financial system; and
(v) upgrading the framework for financial stability, crisis management, and resolution arrangement.
Moving along this path, however, will pose additional risks and new situations. Hence, priority must be given to establishing the institutional and operational preconditions that are crucial to successfully managing a wide-ranging financial reform agenda, and the intent outlined in the latest 12th Five-Year Plan.
The FSAP team comprised Jonathan Fiechter (IMF, Mission Co-Chief), Thomas A. Rose (World Bank, Mission Co-Chief), Udaibir S. Das (Deputy Mission Chief, IMF), Mario Guadamillas (Deputy Mission Chief, World Bank), César Arias, Martin Cihák, Silvia Iorgova, Yinqiu Lu, Aditya Narain, Nathan Porter, Shaun Roache, Tao Sun, Murtaza Syed (all IMF); Massimo Cirasino, Patrick Conroy, Asli Demirgüç-Kunt, Catiana Garcia-Kilroy, Haocong Ren, Heinz Rudolph, Jun Wang, Ying Wang, Luan Zhao (all World Bank); Nuno Cassola, Henning Göbel, Keith Hall, Nick Le Pan, Greg Tanzer, Nancy Wentzler, Rodney Lester, and Walter Yao (all experts). The team met senior officials and staff from relevant government agencies, as well as representatives from financial institutions, industry organizations, and private sector representatives in Beijing, Chongqing, Nanchang, Ningbo, Shanghai, and Shenzhen.
Subsequent to the FSAP mission, the authorities have begun to move on the various FSAP recommendations, and have asked for technical cooperation in several areas relating to the existing financial stability framework.
IMF.Country Report No. 11/321.China, People's Republic of. Published: November 14, 2011.Prepared by the Monetary and Capital Markets and Asia and Pacific Departments. Approved by José Viñals and Anoop Singh.June 24, 2011. People’s Republic of China: Financial System Stability Assessment
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