China banks may nurse huge losses in extreme case: International Monetary Fund

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.
The International Monetary Fund warned Tuesday that China’s banks face growing risks that might hamper growth, adding to concern about the world’s second-largest economy amid Europe’s debt crisis.

The IMF’s comments add to warnings by industry analysts that state-owned banks face a possible rise in bad loans and other problems after a lending boom that helped China rebound quickly from the 2008 global crisis.

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 needs to act quickly because it is vulnerable to destabilising asset bubbles.

"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 126-page report, 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.

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.

Under a severe scenario where banks suffer a confluence of shocks, capital adequacy ratios -- or credit safety nets -- of lenders accounting for about a fifth of China's total banking assets fell below the regulatory minimum of 8 percent.

The IMF said the severe scenario assumes annual economic growth of 4 percent; M2 (money supply) growth of around 10 percent; a property price tumble of nearly 26 percent, and a change in deposit and lending rates of 95 basis points.

However, the Chinese government's response on Tuesday to the report suggested Beijing is not rushing to heed the fund's advice.

"We have also noticed that the report contains several points of view that are not sufficiently comprehensive and objective," the People's Bank of China said in a statement published on its website.

"The government's sway over financial markets has already evolved from direct intervention to asserting influence through regulation of financial companies," the central bank said.

It added that China needs to do its own studies to gauge the feasibility of the IMF's recommendations. Banks “appear to be resilient to isolated shocks” such as a fall in real estate prices, exchange rate changes or deterioration in asset quality, the IMF said.

“If several of these risks were to occur at the same time, however, the banking system could be severely impacted,” it said.

The IMF said its ability to assess the full extent of risks was hampered by incomplete data, lack of a sufficiently long financial record and lack of access to confidential data.

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