The Wall Street Journal: IMF warns Chinese banks may be short on assets to offset potential credit losses

BEIJING — Chinese banks may have insufficient capital to weather potential losses from the nation’s rapidly mounting credit risks, the International Monetary Fund said, in a broad review of China’s financial system.

With Chinese banking-sector assets, at $34.7 trillion, soaring to three times the size of China’s economic output, at $11.2 trillion, the IMF said that “holding more capital would strengthen the banking system and bolster financial stability,” according to a report on Thursday.

The IMF said China should consider boosting risk-weighted assets at its banks by 0.5% to 1% over the coming 12 months. While China’s largest banks are well-capitalized, the IMF said, medium and small banks could face the need to raise even more capital.

The IMF’s review said local-level Chinese government policies have propped up nonviable firms, risky lending is on the rise outside of Chinese banks and retail investors have a widespread belief that debt from Chinese state-owned enterprises has an implicit guarantee.

An expanded version of this report appears on WSJ.com.

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