International Monetary Fund identifies financial risks in China

Such firms with weak fundamentals have become a key concern in China as they contribute to debt vulnerability and low productivity, and this issue is seen as one of the main reasons for the rise in corporate debts.

The report said reining in excessive growth would require China to reduce emphasis on high GDP projections in national plans, which have spurred local authorities to set high growth targets.

The country's debt is now equivalent to 234 percent of the country's total output, the International Monetary Fund report showed. The report found that four-fifths of China's banks were vulnerable to shocks, household debt increased by 15% of GDP in the last five years and corporate debt was 165% of GDP.

She added that "implicit guarantees to SOEs [state-owned enterprises] need to be removed carefully and gradually".

The International Monetary Fund (IMF) on Wednesday welcomed China's efforts to contain financial risks and suggested that China could take further measures to improve financial stability.

"The existence of "shadow banking" loans outside the formal banking system, makes it challenging to assess the scale of private sector debt, and China's lagging regulatory system, which mirrors the slow reforms of its legal system, raises doubts over whether there is sufficient capacity to prevent and address a potential financial crisis that may drag the economy into a long slump", Yueh. Local government leaders were aiming to maintain high employment "even if that means cash-bleeding enterprises continue to operate".

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It added that the system's increasing complexity "has sown financial stability risks".

At times there had been pressure to keep struggling firms open rather than allowing them to fail - a policy that could conflict with financial stability, it added. "Credit growth has outpaced GDP growth, leading to a large credit overhang".

There had also been growth in increasingly complex investment vehicles while risky lending had been moving away from banks to less well-supervised parts of the financial sector.

China's central bank, the People's Bank of China, said overall a series of reports published by worldwide bodies including the IMF were "professional and valuable assessments".

"The descriptions of the stress testing did not fully reflect the outcomes of the test", the People's Bank of China said on its website.

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