The Chinese banks have to increase their capital buffers in order to protect themselves from a sudden economic downturn after the credit boom, warned the International Monetary Fund (IMF). In its first overall assessment of the Chinese financial system in 2011, the IMF recommended a “gradual and targeted increase in bank capital”. In its worst case scenario, the IMF tests assess that banks in China are facing a capital shortage of 2.5% of GDP, which is 280 billion USD in 2016.
According to IMF, 27 out of all 33 banks that went through the stress tests are not capitalized enough at least at one indicator. The tested banks cover about 75% of the banking system’s assets. The greater capital buffers would better reflect potentially underestimated risks arising from bank exposures to shady investments and would absorb losses if some state guarantees are removed.
The four largest Chinese banks, including the largest lender in the world by assets, Industrial & Commercial Bank of China, have sufficient capital, according to the IMF. However, the smaller ones, focused on individual cities, appear to be vulnerable.
“The stress tests reveal widespread under-capitalization outside the four largest banks in a pessimistic scenario”, says the IMF report. “The increase in capital will strengthen the resilience and reliability of the financial system, and will give confidence to the markets”, adds the fund, but without mentioning specific banks that need more capital.
In response to the IMF report, the Chinese National Bank said the assessment was fair, but the regulator questioned the interpretation of stress tests: “The comments on stress tests do not fully reflect test results”, says the central bank statement. “The Chinese financial system showed a relatively strong ability to cope with the risks”, adds the text.
Many economists and financial institutions are worried about Chinese debt and capitalization of the banks. The worst stress tests scenario is not far from the future possibilities in case of economy downturns.