IMF pushes China to reform banks

The International Monetary Fund urged China to expand its oversight of banks as risks increase from off-balance sheet lending and a surge in property prices, Bloomberg reported.

The IMF warned in a review released on Tuesday, that China’s banks face growing risks that could hinder growth, the Associated Press reported. The review did say that banks were robust enough to withstand isolated shocks, but not combined exposure to credit, property and currency risks, BBC reported.

Pushing for more oversight over the market, the IMF said reforms were needed, such as allowing banks to rely more on interest rates.

"China's banks and financial sector are healthy, but there are vulnerabilities that should be addressed by the authorities," said Jonathan Fiechter, the head of the IMF team that conducted the review, the BBC reported.

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The IMF also said banks need to upgrade risk-management systems, the central bank and regulators should add skilled personnel, and disclosure standards must be raised, the BBC reported. The IMF based its report on stress tests of China’s 17 largest state-owned lenders that it conducted with Chinese regulators, the AP reported.

China’s economy, the second-largest in the world, expanded by 9.1 percent in the third quarter ending in September. But it seems growth will slow down as exports weaken due to a slump in US and European demand and a boom in real estate prices, the AP reported.

The warning from the IMF piggybacks the European markets’ spiral downward due to Italy and Greece’s debts. The 126-page report from the IMF did applaud China’s progress into transitioning into a stable financial system but felt it was relying too heavily on the government, CNN reported.

A large portion of China’s banks are state-owned and much of their senior management is appointed by the government, CNN reported.

"The heavy involvement by the state in many aspects of the financial system reduces market discipline, weakens corporate governance, and is likely to create soft budget constraints," the report said, CNN reported.

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