IMF:China's financial system robust overall, further reforms needed

The International Monetary Fund (IMF) said Monday that China's financial system is sound and has achieved remarkable progress. "China has made remarkable progress in its transition toward a more commercially-oriented and financially sound system," the organization said in the Financial Sector Assessment Program (FSAP) review, its first formal evaluation of China's financial system, which was carried out jointly with the World Bank. "Improvements continue to be made to the structure, performance, transparency, and oversight of financial institutions and markets. As a result, the financial sector entered the global financial crisis from a position of relative strength," said the IMF. Meanwhile, the Washington-based international financial institution said that further reforms are needed to promote financial stability and sustainable growth. "China's financial system is robust overall, but faces a steady build-up in vulnerabilities. Further reforms are needed to support financial stability and encourage strong and balanced growth," it said. The IMF added that China's financial supervision and regulation are being strengthened, but risks stem from the growing complexity of the system and the uncertainties surrounding the global economy. China is one of the 25 "systemically important" economies that have agreed to mandatory assessments at least once every five years. The FSAPs are part of the IMF's activities in financial surveillance and the monitoring of the international monetary system. "China's banks and financial sector are healthy, but there are vulnerabilities that should be addressed by the authorities," said Jonathan Fiechter, deputy director of the IMF's Monetary and Capital Markets Department and head of the IMF team that conducted the FSAP. China's economy has been booming over the past two decades, and at the same time its financial sector has become more complex and accompanied with more risks, Fiechter told reporters during a conference call. "While the existing structure fosters high savings and high levels of liquidity, it also creates the risk of capital misallocation and the formation of bubbles, especially in real estate. The cost of such distortions will only rise over time, so the sooner these distortions are addressed the better," he added.