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IMF: Domestic risks to China’s financial system four-fold

The International Monetary Fund reveals potential risks that could shake-up China’s financial system, despite improvements to financial market structure and transparency

The International Monetary Fund (IMF) has unveiled risks faced by China’s financial system, after its huge growth, increased globalisation and activities in shadow banking.

The IMF’s latest report People’s Republic of China: Financial System Stability Assessment states that the main near-term domestic risks to the financial system are four-fold, despite the “remarkable progress” the country has made in terms of its transition towards greater transparency, structure, performance and oversight of financial institutions.

“Despite reform and financial strength, China confronts a steady build-up of financial sector vulnerabilities,” says the IMF report. “The system is becoming more complex and interlinkages between markets, institutions and across international borders are growing. In addition, informal credit markets, conglomerate structures and off-balance sheet activities are on the rise.

“Furthermore, the growth model, the associated and relatively inflexible macroeconomic policy framework, and the government’s important role in credit allocation at the central and provincial levels are leading to a build-up of contingent liabilities. These could affect the needed reorientation toward domestic demand and new sectors of growth. These vulnerabilities are not easily quantified, however, in part due to limitations on monitoring, data collection and inter-agency information exchange.”

The report was based on information available at the time of its completion on June 24.

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