China is not immune to financial crisis, warns IMF

The Chinese financial system is not immune to financial crisis. This is the message from the report published by the International Monetary Fund (IMF) on the financial stability of the world second economy.

The authors estimate that a decline in the housing market would not bring down the financial infrastructure of China, but the risks increase the complexity of the financial sector, facing “a steady accumulation of vulnerabilities.” The volume of loans has increased dramatically. Informal credit and lending mechanisms “contingencies” are increasing. And property prices have reached “relatively high” levels, which increases the likelihood of a rollover. If several shocks were to materialize simultaneously, “the impact could be severe on the banking sector.”

To limit this risk, the IMF called on Beijing to enter the path of reform. On the one hand, it felt an urgent need to improve financial supervision in China. In addition, the fund estimated unavoidable “increase the weight of market mechanisms” in the Chinese financial system.

The need for market mechanisms also applies to the exchange rate policy of China. A force to intervene to keep hold of the value of the Yuan, Beijing is indeed obliged to “sterilize” the inflow of foreign exchange, which “hampers the management of liquidity into the system.”

Finally, the IMF calls on Beijing to diversify its financial system. “The system would be safer if there were other investment opportunities,” says the fund.

The central bank has responded positively to this report as it considers “objective”. But Beijing knows that it would lose an important lever to its economic machine if it allows an opening of financial system.