By Maximilian Clarke

China’s financial system faces a steady build-up in vulnerabilities arising from its complexity and as a result of uncertainties surrounding the global economy, the International Monetary Foundation (IMF) has said.

The IMF’s first Financial Sector Assessment Program (FSAP) of the world’s second strongest economy suggested that its leading banking isntitutions were resilient enough to weather isolated shocks, but that they could be ‘severly inpacted’ if faced with concurrent shocks.

“China’s banks and financial sector are healthy, but there are vulnerabilities that should be addressed by the authorities,” says Jonathan Fiechter, deputy director of the IMF’s Monetary and Capital Markets Department and the head of the IMF team that conducted the FSAP. “While the existing structure fosters high savings and high levels of liquidity, it also creates the risk of capital misallocation and the formation of bubbles, especially in real estate. The cost of such distortions will only rise over time, so the sooner these distortions are addressed the better.”

China’s role as a burgeoning market for UK firms, particularly with respect to high-end, luxury goods has seen many UK small enterprises flourish during the downturn across the eurozone. Reforms to country’s growing financial sector would help prevent further economic decline.

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