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China should prioritize financial stability over growth, IMF says

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China should prioritize financial stability over growth, IMF says

China should focus more on maintaining financial stability than achieving its growth targets as tensions emerge in parts of its financial system, the International Monetary Fund recommended, after a stability assessment of the country's financial sector.

The IMF recommended the formation of a financial stability sub-committee with the "sole mandate of maintaining financial stability." The fund said Dec. 6 that the sub-committee should comprise the People's Bank of China and three other regulatory agencies, and report to the newly formed Financial Stability and Development Committee.

"Tensions at the local government level are even more visible: The apparent primary goals of preventing large falls in local jobs and reaching regional growth targets have conflicted with other policy objectives such as financial stability," the IMF said. "Regulators should reinforce the primacy of financial stability over development objectives.

In its report, the fund cited potential risks such as the rapid rise of corporate and household debt, widespread implicit guarantees, regulatory arbitrage and growth of increasingly complex investment vehicles and the system's increasing complexity and scale.

The fund also recommended a "gradual and targeted" increase in bank capital to help address risks, while recognizing that Chinese authorities have been taking risk-reduction measures. It said China needs to limit credit growth by reducing the emphasis on achieving high GDP growth targets. The recommendations came as IMF warned of an increased chance of financial distress, citing a Bank for International Settlements estimate, according to a Reuters report.

China's central bank said while the IMF recommendations are highly relevant, it does not agree with a few descriptions and views in the reports. For instance, the descriptions of the stress testing did not fully reflect the outcomes of the test, the central bank added.