The Executive Board of the International Monetary Fund (IMF) recently conducted a Financial System Stability Assessment (FSSA) for the People’s Republic of China. The assessment recognized considerable advances made by Chinese authorities to bolster financial supervision, regulation, and systemic risk monitoring since the last assessment in 2017. Key changes included regulatory reforms that mitigated risks associated with non-bank financial institutions.
Despite these improvements, the FSAP identified heightened financial stability risks. Issues such as the downturn in the property sector and pressures on highly leveraged local government financial vehicles (LGFV) were highlighted as potential areas of concern. Economic growth decline could threaten credit portfolio quality, while monetary policies might affect banks' organic profitability. Smaller banks, particularly those following riskier business models, were noted as more susceptible to these risks.
The assessment also pointed out that while larger banks have substantial capital and liquidity buffers, further steps are needed to bolster the financial stability framework. Measures have been taken by Chinese authorities post-FSAP to address property and LGFV challenges, with a view to mitigating potential impacts.
According to Executive Directors, the banking system's resilience was reassuring, even in adverse conditions. They noted, however, the importance of further strengthening data practices and underscored monitoring of mid-size and smaller banks to avoid vulnerabilities. Directors also emphasized enhancing the crisis management framework and strengthening regulatory frameworks to reflect the complexity of China's financial system.
The IMF directors encouraged China's continued efforts to improve risk-based supervision and systemic risk assessment. They lauded progress in green finance and financial inclusion and advised further advancement in these areas.
The ongoing assessment signifies the importance of comprehensive regulatory frameworks, crisis management, and international best practices for maintaining financial stability in China.