Chinese financial system at risk, warns IMF

China is one of 25 "systemically important countries" that has agreed to mandatory evaluations at least once every five years, the IMF said, though Beijing has no obligation to implement the recommended reforms.

However, it added that a full assessment of the risks was hampered by "data gaps", limited information and restrictions on access to confidential figures, the IMF said.

The central bank said the IMF report made "objective and positive" overall assessments but some of the recommendations required "in-depth study", taking into account China's situation.

In a list of 29 key recommendations on how Beijing can improve its financial system the IMF urged policymakers to allow state-owned banks to make lending decisions based on commercial risk rather than government policy.

It also called on Beijing to allow interest rates to be determined by "supply and demand", and to use this tool rather than administrative measures to control credit.

The People's Bank of China has raised interest rates five times since October 2010 but it has been reluctant to hike rates too aggressively for fear of triggering defaults.

China has instead relied on several increases in the reserve requirement ratio - the portion of deposits banks must set aside - to curb lending, which Fiechter told reporters was a "pretty crude tool that may promote shadow banking".

Local government debt has ballooned since Beijing ordered banks to boost lending to combat the 2008 global crisis, with official estimates putting the borrowings at 10.7 trillion yuan at the end of 2010 - or about 27pc of China's 2010 gross domestic product.

But in the past 12 months, as authorities tried to stem the flow of credit to curb surging inflation and property prices, underground lending flourished and is worth an estimated four trillion yuan.

The IMF also called on authorities to loosen currency controls and give autonomy to the central bank and other supervisory bodies to "help bring the system more in line with international practices".

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