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The International Monetary Fund （IMF） issued the review report about Chinese economy on July 17 after ending the fourth negotiation with China.
In the report， IMF forwarded the warning about the fast expanding risk of“non-traditional financial department”. Markus Rodlauer， Vice President of IMF in the Asian-Pacific Area， said that the risk of non-traditional financial department is still under control now. But the fast increase and the regulatory arbitrage raised the concerns of IMF.
Rodlauer said that IMF did not think China to have the risk of “hard landing”. It expected the economic growth rate of China to be 7.75% this year. Even though the downward risk is still lingering， China has the ability to counter the impact. But IMF advised China to enhance the cushion policies.
“In the short term， the primary task of China is to stop the over-speed increase of credit loans and the further accumulation of the risks of financial departments，” the report said. The executive directors of IMF believed that the Chinese economy is now facing the challenge of placing the financial stability risk， credit increase and irregular loans at bay.
IMF warned that the financial activities in China so heavily relied on loans and investment that they undoubtedly increased the labor cost， even though China kept strong economic growth from the outbreak of financial crisis. The incremental leverage， if not handled well， will eat away the balance sheet of financial departments， local governments and enterprises.
This is particularly epitomized by the continuously fast increase of the total volume of social fundraising. According to the report， the total volume of social fundraising began to form an increasingly larger ratio to the GDP. In 2009， the ratio was 12%， but increased to 195% in the first quarter of 2013.
With the development of nontraditional financial department， the fundraising activities gradually turned to the part called “shadow bank” which is under less regulation. This formed the risk to the financial stability. In its report， IMF said that the rapid increase in trust business and enterprise debts pose great challenges to the regulation， underwriting standards and pricing risk control. In addition， the blusterous assets management products raised the concerns about the transparency of the potential capital pool. The enhancement of regulation and control， which happened recently， could lower some risk but are unable to remove the problems hidden in the incomplete information disclosure and moral risk. “We do not want to call them ‘shadow bank’； instead， we would rather call them the non-traditional financial media， because it is not indeed running in the shadow. It is more like a financial innovation and a mutation， which have both advantages and disadvantages，” Rodlauer said.
The volume of fundraising through banks’ assets management product actually takes a very small part – 10% or so– of the banking deposits. So it is still within the control range. The “non-traditional financial media” is actually a kind of credit based on the market demand.“The rapid development and transformation of Chinese economy was beyond most people’s expectation five years ago. In 2013， 50% of the financial media in China are based on the market. This is too surprising.”
Rodlauer said that IMF mainly worries about two things concerning the Chinese economy. Firstly， the banking regulatory department might not catch up with various kinds of financial innovations， which will cause the credit quality problem. Secondly， even though it is market-based， it is actually a kind of“regulatory arbitrage” to avoid regulatory rules. These rules， such as the limitation of deposit interest rate， could only work for traditional credit loans.
IMF advised the Chinese government to treat these two problems cautiously. The Chinese government basically agreed with IMF’s review and promised to limit the growth of nontraditional financial sectors in China.
In the report， IMF forwarded the warning about the fast expanding risk of“non-traditional financial department”. Markus Rodlauer， Vice President of IMF in the Asian-Pacific Area， said that the risk of non-traditional financial department is still under control now. But the fast increase and the regulatory arbitrage raised the concerns of IMF.
Rodlauer said that IMF did not think China to have the risk of “hard landing”. It expected the economic growth rate of China to be 7.75% this year. Even though the downward risk is still lingering， China has the ability to counter the impact. But IMF advised China to enhance the cushion policies.
“In the short term， the primary task of China is to stop the over-speed increase of credit loans and the further accumulation of the risks of financial departments，” the report said. The executive directors of IMF believed that the Chinese economy is now facing the challenge of placing the financial stability risk， credit increase and irregular loans at bay.
IMF warned that the financial activities in China so heavily relied on loans and investment that they undoubtedly increased the labor cost， even though China kept strong economic growth from the outbreak of financial crisis. The incremental leverage， if not handled well， will eat away the balance sheet of financial departments， local governments and enterprises.
This is particularly epitomized by the continuously fast increase of the total volume of social fundraising. According to the report， the total volume of social fundraising began to form an increasingly larger ratio to the GDP. In 2009， the ratio was 12%， but increased to 195% in the first quarter of 2013.
With the development of nontraditional financial department， the fundraising activities gradually turned to the part called “shadow bank” which is under less regulation. This formed the risk to the financial stability. In its report， IMF said that the rapid increase in trust business and enterprise debts pose great challenges to the regulation， underwriting standards and pricing risk control. In addition， the blusterous assets management products raised the concerns about the transparency of the potential capital pool. The enhancement of regulation and control， which happened recently， could lower some risk but are unable to remove the problems hidden in the incomplete information disclosure and moral risk. “We do not want to call them ‘shadow bank’； instead， we would rather call them the non-traditional financial media， because it is not indeed running in the shadow. It is more like a financial innovation and a mutation， which have both advantages and disadvantages，” Rodlauer said.
The volume of fundraising through banks’ assets management product actually takes a very small part – 10% or so– of the banking deposits. So it is still within the control range. The “non-traditional financial media” is actually a kind of credit based on the market demand.“The rapid development and transformation of Chinese economy was beyond most people’s expectation five years ago. In 2013， 50% of the financial media in China are based on the market. This is too surprising.”
Rodlauer said that IMF mainly worries about two things concerning the Chinese economy. Firstly， the banking regulatory department might not catch up with various kinds of financial innovations， which will cause the credit quality problem. Secondly， even though it is market-based， it is actually a kind of“regulatory arbitrage” to avoid regulatory rules. These rules， such as the limitation of deposit interest rate， could only work for traditional credit loans.
IMF advised the Chinese government to treat these two problems cautiously. The Chinese government basically agreed with IMF’s review and promised to limit the growth of nontraditional financial sectors in China.