China’s Financial System Poses Stability Risk, Says IMF

 Financial security and supervision of banks in China has improved, says the IMF, but ‘risky lending’ is happening in other quarters. Photograph: Reuters
Financial security and supervision of banks in China has improved, says the IMF, but ‘risky lending’ is happening in other quarters. Photograph: Reuters
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China’s Financial System Poses Stability Risk, Says IMF

 Financial security and supervision of banks in China has improved, says the IMF, but ‘risky lending’ is happening in other quarters. Photograph: Reuters
Financial security and supervision of banks in China has improved, says the IMF, but ‘risky lending’ is happening in other quarters. Photograph: Reuters

Fears that China risks being the cause of a fresh global financial crisis have been highlighted by the International Monetary Fund in a warning about the growing debt-dependency of the world’s second-biggest economy.

China should prioritize financial stability above development goals, as pursuit of regional growth targets and helping firms avoid heavy job losses had led to a surge in debt, particularly at local government level, the IMF said.

Noting a lack of coordination and inadequate systemic risk analysis in a report released on Wednesday, the IMF also recommended the formation of a financial stability sub-committee comprising the central bank and three financial regulatory agencies, and an increase in staff for the banking watchdog.

Since the IMF’s last assessment of the Chinese financial sector’s resilience to shocks and contagion in 2011, two concerns remain - credit growth remains high and the expansion of wealth management products (WMPs), said Ratna Sahay, deputy director of the IMF’s Monetary and Capital Markets Department.

“Risks are large,” Sahay told reporters during an online briefing. “Having said that, the authorities are really aware of risks and they are working proactively to contain these risks.”

The IMF report said that while China has been taking steps to address its debt risks, reining in excessive credit growth will require a de-emphasis on high GDP projections in national plans that have spurred local governments to set high growth targets.

“The system’s increasing complexity has sown financial stability risks,” the IMF’s assessment said. “Credit growth has outpaced GDP growth, leading to a large credit overhang. The credit-to-GDP ratio is now about 25% above the long-term trend, very high by international standards and consistent with a high probability of financial distress.

“As a result, corporate debt has reached 165% of GDP, and household debt, while still low, has risen by 15 percentage points of GDP over the past five years and is increasingly linked to asset-price speculation. The buildup of credit in traditional sectors has gone hand-in-hand with a slowdown of productivity growth and pressures on asset quality.”

But the near-term prioritization of social stability seems to depend on credit growth to sustain financing to firms even when they are non-viable, it said.

“The apparent primary goals of preventing large falls in local jobs and reaching regional growth targets have conflicted with other policy objectives such as financial stability,” the report said.

“Regulators should reinforce the primacy of financial stability over development objectives,” the fund said.

China’s credit-to-gross domestic product (GDP) ratio is very high by global standards and consistent with a high probability of financial distress, the IMF said, citing an estimate from the Bank for International Settlements.

The IMF specifically warned that the rapid development of financial products for investors could pose grave risks.

“We are also concerned that in a very innovative financial system such as China‘s, new products can emerge very quickly and very rapidly become large and popular, and potentially a systemic risk,” said James Walsh, deputy division chief of the Monetary and Capital Markets Department.

“Better coordination among supervisors is therefore essential to make sure that these risks are contained, and that everyone understands what the risks to these products are,” he said.



World Bank: Earthquake Worsens Myanmar's Economic Decline

This photo taken on May 8, 2025 shows a worker walking past sacks of rice in a warehouse on the outskirts of Zalun township in Myanmar's Irrawaddy Delta region. (Photo by Sai Aung MAIN / AFP)
This photo taken on May 8, 2025 shows a worker walking past sacks of rice in a warehouse on the outskirts of Zalun township in Myanmar's Irrawaddy Delta region. (Photo by Sai Aung MAIN / AFP)
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World Bank: Earthquake Worsens Myanmar's Economic Decline

This photo taken on May 8, 2025 shows a worker walking past sacks of rice in a warehouse on the outskirts of Zalun township in Myanmar's Irrawaddy Delta region. (Photo by Sai Aung MAIN / AFP)
This photo taken on May 8, 2025 shows a worker walking past sacks of rice in a warehouse on the outskirts of Zalun township in Myanmar's Irrawaddy Delta region. (Photo by Sai Aung MAIN / AFP)

Myanmar's beleaguered economy is expected to contract by 2.5 percent in the 2025/26 fiscal year largely due to the devastating impact of a powerful earthquake in late March, the World Bank said in a report on Thursday.

The World Bank said direct damages to property and infrastructure from the 7.7 magnitude quake were estimated at $11 billion, or 14% of the nation's gross domestic product, estimating that economic output would be about $2 billion lower than it otherwise would have been because of the quake.

The quake affected more than 17 million people, with nine million severely impacted, the World Bank said. The death toll has topped 3,700, according to Myanmar's ruling junta.

"The earthquake caused significant loss of life and displacement, while exacerbating already difficult economic conditions, further testing the resilience of Myanmar's people," Melinda Good, Division Director for Thailand and Myanmar, said a statement.
"Recovery efforts are essential to help the most vulnerable populations."

A junta spokesman did not respond to a call from Reuters seeking comment on the report.

In December, the World Bank had projected Myanmar's economy would shrink 1% in the 2024/25 fiscal year that ended in March due to the severe flooding in the country.

Myanmar has been in turmoil since the military seized power in a coup in February 2021, sparking a civil war. There have been international efforts to stall the conflict, but rebels have accused the junta of breaching a ceasefire called to allow relief efforts to reach earthquake-affected areas.

The hardest-hit regions of Mandalay and Naypyidaw were expected to lose up to one-third of their production between April and September before a partial recovery in the second half of the fiscal year, the World Bank said.

The earthquake could increase the national poverty rate by 2.8 percentage points, pushing more households into poverty, the report stated. A survey before the quake estimated the poverty rate at 31% in 2024.

"Myanmar's compounding crises have put household coping mechanisms under severe stress," said Kim Edwards, Senior Economist and Program Leader for Thailand and Myanmar.