CHINA’S central bank yesterday expressed its confidence about the stability of the country’s financial system, after the International Monetary Fund and World Bank pointed out potential risks in several assessment reports.
The reports yesterday come a day after Chinese regulators drafted new rules to strengthen bank funding.
The People’s Bank of China said the reports have fully acknowledged China’s achievements in recent economic and financial reforms, but there are “a few descriptions and views in the reports that we don’t agree with.”
The descriptions of the stress testing did not fully reflect the outcomes of the test, the PBOC said on its website.
The reports are part of the update of the China Financial Sector Assessment Program. The IMF and World Bank launched the FSAP in 1999 to gauge the stability and soundness of the financial sector, the regulatory framework of member economies and the sector’s potential contribution to growth. China went through its first FSAP exercise in 2009-2011.
The update, issued after two years of research, said tensions have emerged as China is undergoing a necessary but prolonged economic and financial transformation, the IMF said.
The tensions identified include China’s rapid build-up of credit and risky lending moving away from banks toward less-regulated parts of the financial system, while implicit guarantees added to these risks.
“The system’s increasing complexity has sown financial stability risks,” the IMF said, advising China to take measures such as strengthening of systemic risk oversight, further improving regulation and moving toward functional supervision.
China has largely relied on debt-fueled investment and exports to drive its tremendous economic growth, but the IMF said this model has reached its limits.
Part of the problem lies in high growth targets, the IMF added, which incentivize local governments to extend credit and protect failing companies. “We recommend the authorities to de-emphasize the GDP (growth),” said Ratna Sahay, deputy director of the IMF’s Monetary and Capital Markets Department. China should “incite local governments to strengthen supervision on risks”, she added.
The central bank said under the severely adverse scenario during the stress testing, the common equity tier 1 ratios of the banks whose combined assets account for over 65 percent of the total commercial bank assets in China have remained 7 percent and above, attesting to the strong resilience of the financial system.
It said the country’s commercial banks have enhanced efforts to address non-performing loans and kept the NPL ratio at a low level. The China Banking Regulatory Commission said that the NPL ratio of Chinese banks stood at 1.74 percent at the end of September, flat with the previous quarter.
According to the IMF, the Chinese banks’ NPL ratio was 1.674 percent by 2015, much lower than the world’s average of 3.925 percent.
Meanwhile, corporate profitability has improved this year, and local government borrowing has been backed by long-term cash-generating assets, making very limited room for any underestimation of NPL ratio, the central bank said.