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Banking & Finance

IMF cautiously welcomes drive by China to rein in credit leverage

PUBLISHED : Thursday, 04 May, 2017, 11:56am
UPDATED : Thursday, 04 May, 2017, 10:51pm

The International Monetary Fund has cautiously welcomed the latest efforts by Chinese authorities to reduce systemic leverage.

The Washington-based agency, however, said an important test would be whether Beijing can sustain the drive to contain excessive lending should the economy enter a downturn.

So far this year, Chinese regulators, most notably the China Banking Regulatory Commission, have published new regulations with the aim of reducing leverage in China’s financial system and increasing overall transparency. ga

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“We have already seen some impact on credit growth and reduced leverage from the tightening measures. We’re optimistic that if sustained, these measures can help contain speculative credit and excessive credit growth in the system,” Sally Chen, IMF resident representative in Hong Kong told the Post in response to emailed questions.

Countries that have experienced such sharp acceleration in leverage... tend to see either a sharp growth contraction, and/or a financial crisis
Sally Chen, IMF resident representative in Hong Kong

The IMF has for many years warned of the increasing risks within China’s financial system, citing rapid borrowing which has pushed the credit-to-GDP ratio to 200 per cent, up from just under 100 per cent prior to the 2008 financial crisis.

However quarterly data showing GDP growth above target has given some breathing space.

“The strong GDP reading in the first quarter provides cushion for such tightening measures. Banks and other financial institutions have already responded,” Chen said.

“The key, of course, is whether these measures will be sustained in the months ahead should growth soften.”

Chen acknowledged that Beijing’s commitment depended on the degree to which growth softened.

“We project growth of 6.6 per cent in 2017, with upside risk given recent strong momentum, so we see room for a modest growth slowdown later this year while still meeting the government’s target of 6.5 per cent.”

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China’s GDP grew 6.9 per cent in the first quarter, slightly higher than expected, however, initial economic data from April indicates that momentum may be ebbing.

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The IMF has long warning about the risks China poses to the global economy, a view it restated in its Global Financial Stability Report in April, which described economic vulnerabilities in China as being one of the major threats to the global outlook.

“The GFSR has repeatedly flagged rising financial vulnerabilities in China, particularly the rapid growth in credit,” Chen said.

“Our analysis found that in most cases, countries that have experienced such sharp acceleration in leverage, starting from a relatively-high level of debt, as in China’s case, tend to see either a sharp growth contraction, and/or a financial crisis.”

The CBRC has been the lead government regulator in the crack down on shadow banking activity, forcing banks to acknowledge risks on their book.

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It is this that the latest measures are seeking to avoid. A range of different regulators have been involved in the moves, with the CBRC cracking down on shadow banking activity, forcing banks to acknowledge risks on their book.

Among other state bodies, the People’s Bank of China has put a squeeze on the amount of money in the system, while the securities regulator has lashed out at listed companies for irregularities.

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