On December 6, the International Monetary Fund (IMF) released its assessment on China’s financial stability and identified three major “tensions” emerging in Chinese financial system.
The first risk identified by the IMF is high corporate debt and household indebtedness. IMF argues that “the credit needed to generate additional GDP growth has led to a substantial credit expansion.” The problem, the IMF added, is mainly caused by the Chinese authorities, particularly at the local government level, as they have added strong “pressures to keep non-viable firms open — rather than allowing them to fail.”
The second risk, according to the IMF, is that risky lending has moved away from banks to the less-regulated parts of the financial system, such as asset managers and insurance companies. These fast growing non-bank financial institutions — or “shadow banking” sector –are challenging to supervise.
The third problem indicated by IMF is that China’s “widespread implicit guarantees” have contributed to moral hazard and excessive risk-taking. China’s financial institutions are reluctant to allow retail investors to take losses; the Chinese government tends to endorse debt issued by state-owned enterprises and stabilize stock and bond markets, the IMF explained.
“The system’s increasing complexity has sown financial stability risks,” the IMF concluded.
On December 7, China’s central bank — the People’s Bank of China (PBOC) — made a promptly reply to the IMF report. Not only did the PBOC accept IMF’s “overall” “professional and valuable” assessments, but vowed to improve the weaknesses by adapting the IMF’s recommendations to the specificities in China’s financial sector. But the PBOC also noticed that it disagreed with “a few descriptions and views in the report.” China’s central bank argued, for example, that China’s state-owned enterprises have improved significantly compared to the past.
Although still maintaining that China’s general situation is under control, the PBOC showed a modest and sincere attitude toward criticism from an international organization, which is a rare move for a Chinese bureaucratic department against the backdrop of China’s increasingly assertiveness in today’s world.
The PBOC’s openness to criticism directly stems from the management of Zhou Xiaochuan, the governor of the PBOC. As The Diplomat has reported earlier, Zhou himself has been considerably straightforward about China’s financial problems. Especially as his retirement is approaching, Zhou has issued a series of clear-cut warnings recently.
In comparison, Zhou’s ciritism of China’s financial system sounds even harsher than that of the IMF.
For example, Zhou published an article on the PBOC website in November, urging China to beware of “systemic financial risks” — including “black swan” events and the “gray rhino” risks. He also argued that deepened reform and opening up are the key measures to proactively control such risks in China’s financial sector.