The increase in debt levels pose “great risks” to China’s economy, according to the International Monetary Fund (IMF).
In his first report from the year 2011 in China’s resilience to shocks and contagion, the IMF said it still had concerns about the imbalances in the world’s second-largest economy.
A stress test of chinese banks found four-fifths were vulnerable.
Beijing should put less emphasis on growth, beef up the regulation and to improve the banks finance, the IMF said.
China’s “big four” banks had adequate capital, but “large, medium, and city commercial banks appear vulnerable,” the IMF said.
The stress tests of the banks in the celebration of 171tn yuan ($26tn; Â£19 billion) in total assets, and 27 of the 33 tested needed to raise more funds, despite the fact that already comply with Basel III regulations on bank capitalisation.
The IMF warned in October of China’s reliance on debt was growing at a “dangerous rhythm”.
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China has seen a solid growth in recent years, driven by debt-financed investment and exports. But in order to maintain high rates of growth, protect jobs and social stability, local governments have extended credit and protected from the bankrupt companies, the report said.
China’s debt has soared and is now equivalent to 234% of the total production of the country, according to the IMF.
“The apparent main objectives of the prevention of large falls in the local jobs and region-wide goals of growth have to be in conflict with other policy objectives, such as financial stability,” the report says.
The IMF acknowledged that the authorities were already taking measures to contain the risks. But the Fund said that China should adjust its economic strategy more.
“We encourage the authorities to highlight the GDP growth”, said Ratna Sahay, deputy director of the IMF Monetary and Capital Markets Department.
“The implicit guarantees to public enterprises [state-owned enterprises] need to be removed carefully and gradually,” he said.
The IMF also warns against the rapid development of new financial products, said that it might “very quickly become big and popular and, potentially, systemic risk”.
The Fund says that a better coordination between the supervisors was essential to contain the “grave” of the risks posed by innovative products.