China vulnerable to asset bubbles, warns IMF

Tue Nov 15, 2011 4:12am EST
 
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By Koh Gui Qing

BEIJING (Reuters) - China's biggest commercial banks face systemic risks if a combination of credit, property, currency and yield curve shocks that could be withstood in isolation were to occur together, the International Monetary Fund warned on Tuesday.

But China can contain these dangers by freeing up financial markets to give investors, commercial banks and the central bank greater autonomy from government control, the fund said in its first-ever review of the Chinese financial system.

While not predicting an imminent disaster, the IMF made clear China needed to act quickly because it is vulnerable to destabilizing asset price booms.

"The existing configuration of financial policies fosters high savings, structurally high levels of liquidity, and a high risk of capital misallocation and asset bubbles, particularly in real estate," the IMF said.

The report, which was completed in June but published only on Tuesday, contains 29 key recommendations. The fund said it ran a stress test on 17 banks that account for 83 percent of China's commercial banking system.

(For a link to the full report, click here

ssachina2011.pdf)

The test, done in collaboration with the Chinese central bank and bank regulator, showed banks' non-performing-loan ratios rose by at least one percentage point for each one-percentage-point drop in gross domestic product.   Continued...