IMF GFSR: Complex corporate arrangements obscure risk assessment of China's financial sector

The IMF's latest Global Financial Stability Report released in April finds the Chinese financial markets remain susceptible to shocks, despite regulatory reforms by Chinese officials. The IMF repeated its message that China's large-scale and opaque interconnections within the financial sector continue to pose stability risks.

The traditional banking sector is linked to shadow banking sector through exposure to high-risk off-balance-sheet investment vehicles. In addition, insurance companies have invested extensively in poorly regulated investment products and depend on them to reach their profitability targets. Small banks and insurance companies are among the most exposed and vulnerable. They must deal with complicated financial instruments even as they poorly grasp the associated risks and are less prepared to absorb potential losses. The IMF welcomed China's decision to create a unified financial regulator (China Banking and Insurance Regulatory Commission, CBIRC), and expects it to bring about much-needed cooperation. The GFSR notes, however, that assessment of financial sector risk is complicated by opaque cross-holding arrangements and leverage structures, as well as a lack of clarity on the actual risk of investment products.

In April, IMF also released its World Economic Outlook. The IMF expects Chinese GDP to grow by 6.6 % this year and 6.4 % next year.