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China: IMF worries about zombie firms and products opaque financial

The International Monetary Fund (IMF) once again sounded the alarm Thursday on financial risks in China, pointing to the dangers of companies surviving only credit and the proliferation of complex and opaque investment products poorly regulated.

While the world’s second-largest economy is seeing its total debt soar, Beijing has taken “welcome steps” to regulate its financial sector, but persistent risks threaten the country’s financial stability, the IMF warns in a report.

The first source of concern is the endless boom in lending thanks to a very accommodating monetary policy, which keeps “zombie companies” that have long since ceased to be profitable and survive by going into debt. .

“The pressures to keep non-viable businesses alive, rather than let them go bankrupt, are strong, especially at the level of local authorities” where the concern to maintain employment and activity sometimes outweighs financial stability , notes the report.

This support for GDP is therefore paid for by an increase in corporate debt.

Similarly, the “implicit” guarantee claimed by the state groups, that is to say the idea that the state will not let them sink and vouch for their debt, fuels the risks.

The problem is particularly acute in iron and steel or coal, sectors dominated by massive state conglomerates and penalized by colossal overcapacity.

Under these conditions, “we recommend the government to focus less on GDP”, in order to reduce pressure on local authorities and focus on “quality of growth”, insisted at a conference in Ratna Sahay, Deputy Director, IMF Monetary and Capital Markets Office.

As for the “implicit guarantees” enjoyed by public companies, “they will have to be abolished gradually”, by strengthening banks’ resources to deal with possible disruptions and by raising the awareness of investors, she adds.

-‘Proliferation’-

Finally, the Washington organization points to the rise of “increasingly complex” financial products: financial companies such as asset management funds or insurers “grow faster than the banking sector, thanks to the proliferation of investment products “.

However, continuous innovation and the rapid emergence of new asset management products, often popular because of strong promised returns, greatly complicates regulation by authorities lacking responsiveness and manpower, deplore analysts of the Fund.

Similarly, “risky loans have migrated from (traditional) banks to much less regulated parts of the financial system” – the famous “shadow finance” that Beijing is trying to stem.

While Ms. Sahay welcomes the recent regulatory tightening of micro-credit online: among others, loans to people without income are now prohibited and the annualized interest rate is capped at 36%, so as to limit abuse. and financial risks in cascade.

But for her, it still remains to strengthen the coordination between the various Chinese regulators, who separately oversee the financial markets, banks and insurers.

In the wake, the Chinese central bank (PBOC) reacted on Thursday, hailing a report “recognizing” Beijing’s reform efforts, but challenging “certain conclusions and views” including the results of “stress tests” banking led by the IMF.

And to point out that regulatory adjustments are already accelerating.

In fact, after the warning shot last week on micro-credit, the banking regulator announced Wednesday more demanding ratios to measure the liquidity of financial institutions … while acknowledging the passage “risks (…) more and more contagious through the banking system “under tension.


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