Demand for high-yield investment products coupled with stricter oversight of the banking sector has resulted in the growth of “increasingly complex investment vehicles”, from non-bank entities such as asset managers.
Risky lending has shifted from banks toward “the less-well-supervised parts of the financial system.
“Non-bank financial institutions, including asset managers and insurance companies, which offer a proliferation of investment products, have grown even faster than the banking sector.”
Because banks have “uncertain linkages” with non-bank financial entities, regulatory control is difficult, the report said.
However, China recently introduced stricter guidelines for asset managers, which aim to increase regulatory control over the industry.
The IMF report highlighted that government policies offer “implicit guarantees” and therefore support risk-taking among investors.
They include “reluctance among financial institutions to allow retail investors to take losses; the expectation that the government stands behind debt issued by state-owned enterprises and local government financing vehicles; efforts to stabilise stock and bond markets in times of volatility; and protection funds for various financial institutions”.
In terms of the broader economy, the IMF also warned about “expansionary” government policies have resulted in keeping non-viable companies functioning.
“Pressures to keep non-viable firms open—rather than allowing them to fail—are strong, particularly at the local government level, where these objectives, at times, conflict with financial stability.
“As a result, the credit needed to generate additional GDP growth has led to a substantial credit expansion resulting in high corporate debt and household indebtedness rising at a fast pace, albeit from a low base.”