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.



China Calls for Building up Consensus with US after ‘Candid’ Trade Talks 

Chinese Vice Premier He Lifeng leaves Lancaster House, on the second day scheduled for trade talks between the US and China, in London, Britain, June 10, 2025. (Reuters)
Chinese Vice Premier He Lifeng leaves Lancaster House, on the second day scheduled for trade talks between the US and China, in London, Britain, June 10, 2025. (Reuters)
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China Calls for Building up Consensus with US after ‘Candid’ Trade Talks 

Chinese Vice Premier He Lifeng leaves Lancaster House, on the second day scheduled for trade talks between the US and China, in London, Britain, June 10, 2025. (Reuters)
Chinese Vice Premier He Lifeng leaves Lancaster House, on the second day scheduled for trade talks between the US and China, in London, Britain, June 10, 2025. (Reuters)

China's Vice Premier He Lifeng said China and the United States should strengthen consensus and maintain communication, state news agency Xinhua reported on Wednesday, after the two countries agreed to get a delicate trade truce back on track.

US and Chinese officials, including He, concluded two days of negotiations in London on Tuesday to resolve key trade issues in the two superpowers' bruising tariff war, including on a raft of export control measures that have hobbled global supply chain.

The two sides should use their consultation mechanism to further "build up consensus, reduce misunderstandings and strengthen cooperation", He was quoted as saying by Xinhua, describing the talks as candid and in-depth.

China and the US should safeguard the hard-won outcome from their dialogue, and push for stable and long-term bilateral trade and economic ties, He said.

China's stance on trade issues with the US was clear and consistent, He added, reiterating that China was sincere in trade and economic consultations but had its principles.

Beijing and Washington have, after striking a 90-day truce in Geneva last month, suspended most of the triple-digit tariffs they had heaped on each other's goods. But bilateral ties remain strained over unresolved trade issues, such as China's rare earth export controls and US curbs on chip-related exports.

The London talks took place after a rare phone call between Chinese President Xi Jinping and US President Donald Trump on Thursday.

US Commerce Secretary Howard Lutnick, who represented the US in London, said the new agreement would remove restrictions on Chinese exports of rare earth minerals and magnets and some of the recent US export restrictions "in a balanced way", without providing further details.

The two negotiating teams would present the framework to their respective presidents for approval, Lutnick said.