The IMF’s latest Global Financial Stability Review notes that while financial conditions in China are relatively stable, the risks confronting the financial sector are daunting. Problems concern almost all actors in the financial sector, i.e. banks, other financial entities, the non-bank corporate sector and households.
In the latest stability report, the IMF focuses specifically on risks facing the corporate sector where most Chinese debt is concentrated and where there is great uncertainty about the ability of borrowers to service their loans. The IMF estimates that the debt of companies where debt-servicing costs exceed earnings now corresponds to about 35 % of GDP. Such debt is expected to soar to around 70 % of GDP if China experiences a rapid economic slowdown and financing dries up. When corporate revenue is inadequate to service debt, the problems are likely to be manifested in the banking sector.
The IMF also called attention to last summer’s bailouts of three banks (Baoshang, Jinzhou and Hengfeng) as they highlight the challenges facing small and mid-sized banks. The IMF said it was critical for China to rapidly establish a bank resolution system along with other financial market reforms.