Beijing, Dec 7 (AFP) The International Monetary Fundtoday warned of brewing risks in China's banking system as itfound dozens of crucial lenders needed to beef up theirdefences against possible financial crises.
The IMF report comes a day after regulators in Beijingdrafted new rules to strengthen bank funding, and follows anumber of alerts about a ballooning debt problem in theworld's number-two economy.
Near the top of the list in the IMF study on thestability of China's financial system is the need for banks toincrease their capital to ward off risks from mounting debt.
China has largely relied on debt-fuelled investment andexports to drive its tremendous economic growth, but the Fundsaid this model has reached its limits.
Part of the problem lies in high growth targets, the IMFsaid, which incentivise local governments to extend credit andprotect failing companies.
"We recommend the authorities to de-emphasise the GDP(growth)," Ratna Sahay, deputy director of the IMF's Monetaryand Capital Markets Department, said during a news conference.
China should "incite local governments to strengthensupervision on risks", she added.
Abundant credit allows local governments to hit highgrowth figures but now each extra dollar of debt is producingdiminishing returns.
The ballooning debt -- estimated at 234 percent of grossdomestic product by the IMF -- adds financial risk and mayweigh on China's future economic growth.
"Credit growth is an important indicator of futurefinancial distress, because lending standards often fall inthe rush to make more loans," IMF experts warned in a blogpost.
The Fund's experts carried out stress tests on dozens ofbanks.
China's big four banks had adequate capital but "large,medium, and city-commercial banks appear vulnerable", the IMFsaid.
It added that 27 out of the 33 banks tested -- accountingfor three-quarters of China's banking system assets -- were"undercapitalised relative to at least one of the minimumrequirements".
While the country's banking system meets the requirementsof global banking rules known as Basel III, "currentcircumstances warrant a targeted increase in capital", thereport said.
"This would create a buffer to absorb potential lossesthat can be expected during the economic transition as creditis tightened and implicit guarantees are removed."China's central bank said it disagreed with "a fewdescriptions and views" in the report.(AFP)AMS.
This is unedited, unformatted feed from the Press Trust of India wire.