IMF Warns China to Reform Financial System

The International Monetary Fund warned China on Tuesday that tight government management of the nation’s banking and financial system is responsible for the growing risk Chinese banks are facing.

The New York Times reported that in the 125-page report on China’s financial system, the IMF said that State controls over the economy were partly to be blame for the high property prices, excessive bank lending and mounting local government debt, which were among the growing risks that threatened to undermine the country’s economic boom.

In the IMF report, China’s banking and financial system is portrayed as huge, complex and flawed, with state bank lending favoring state companies over private corporations and the financial system creating distortions that affect a wide range of factors, including interest rates, property prices and the exchange rate.

According to the BBC, the IMF has urged reforms to allow banks to rely more on market mechanisms, such as interest rates.

The IMF also recommended the Chinese government play less of a role in the banking system, and allow lending decisions to be based on commercial goals.

The Washington Post says that China’s economy expanded by 9.1 percent in the quarter ending in September, but growth is forecast to slow as exports weaken because US and European demand is decreasing and real estate prices are increasing.

Reuter reported that the IMF said Beijing needed to liberalize exchange rate, develop the capital market, free the capital account and roll out a broad-based property tax in order to keep the house market growing healthily.

According to The New York Times, in a response to the report, China’s central bank said that the report was largely constructive, but added that “several points in the report are not comprehensive or objective enough, and the suggestions regarding the time frame and prioritization of some reform measures lack a thorough understanding of China’s reality.”

The Financial Times said the report was based on the Financial Sector Assessment Program for China conducted by the IMF and World Bank from June to December last year.

It was the first such report published about China after the assessments were made a mandatory part of IMF surveillance every five years for jurisdictions deemed systemically important.