The Gary Null Blog

The International Monetary Fund (IMF) has warned that China's financial system "faces a steady build up in vulnerabilities".

In a review, publicly released on Tuesday, the IMF said that banks were robust enough to withstand isolated shocks.

But not, it said, combined exposure to credit, property and currency risks.

The IMF has urged reforms, including allowing banks to rely more on market mechanisms such as interest rates.

"China's banks and financial sector are healthy, but there are vulnerabilities that should be addressed by the authorities," said Jonathan Fiechter, the head of the IMF team that conducted the review.

The IMF has recommended the Chinese government play less of a role in the banking system, and allow lending decisions to be based on commercial goals.

The current system has encouraged over-investment and fuelled asset bubbles, said the IMF.

"While the existing structure fosters high savings and high levels of liquidity, it also creates the risk of capital misallocation and formation of bubbles, especially in real estate," said Mr Fiechter.

The review said that this has lead to "low investment efficiency".