Before China can remove implicit guarantees from financial system it must take these steps, says IMF
Chinese banks need to be more resilient, and consumers and local governments more willing to take losses before China’s economy can cope without a culture of guaranteed returns
For Chinese authorities dealing with risks to the country’s financial system, the challenge is not just embarking on the right reforms – but also getting them in the right order.
This is particularly clear when it comes to dealing with implicit guarantees, said a senior official at the International Monetary Fund.
“It is important to get rid of the problem as it leads to excessive risk taking, but it’s a very difficult question. We spent an enormous amount of time thinking about the sequencing of reforms and thinking about any financial disruptions that might come from the removal of implicit guarantees,” said Ratna Sahay, deputy director of the IMF’s monetary and capital markets department.
In China, many retail investors assume that if they lose money on their investments, the bank that sold these to them should cover the losses, while the banks themselves assume that loss-making state-owned enterprises will be bailed out by the central or local governments.
The results of such implicit guarantees are “excessive risk taking on the part of households, companies, local governments and financial institutions”, the IMF said in its five yearly Financial System Stability Assessment, which was led by Sahay.
