The IMF and the World Bank will regard the publication of its report on the first Financial Sector Assessment Programme, or FSAP, for China on Tuesday as something of a triumph.
Pre-crisis, China (along with the US) refused to undergo the programme, which serves as a health check on a country’s financial network. Now, they are compulsory for those financial networks deemed systemically important.
That’s to be applauded; the more that is done to warn of risks to financial stability, the better. But the People’s Bank of China’s response to the exercise highlights its limits.
As a means of shedding light to the media and investors on the greatest risks facing China’s financial system the report has its uses. Though for those watching China closely, there is little that will particularly surprise them.
What is perhaps of more interest is China’s reaction to the report’s recommendations. This from the FT’s Simon Rabinovitch:
The People’s Bank of China said the IMF report was generally constructive but that some of the recommendations were wide of the mark.
“There are certain views in the report that are insufficiently comprehensive and insufficiently objective,” the central bank said in a statement. “Some of the recommendations such as the timeframe and the prioritisation of reforms lack a thorough understanding of China’s reality.”
Without specifying where it believed that the IMF report had erred, the central bank said China had made great strides in reforming its currency, its banks and its broader financial sector.
In the face of resistance such as this from national authorities, what can the Fund and World Bank do to ensure that China implements policy in line with its recommendations? Besides encouraging peer pressure, not much. This from the IMF:
How countries choose to address these recommendations is up to the authorities. Like all policy recommendations made in the context of IMF surveillance, the FSAP recommendations are of an advisory nature.
The FSAPs, then, risk suffering the same fate as central banks’ financial stability reports did pre-crisis. Many of these reports warned of the dangers to stability (though they failed to spot the degree to which these dangers could wreak havoc on their economies). Yet their warnings went unheeded as long as confidence, and profits, remained abundant.
As Sir Mervyn King, the governor of the Bank of England, put it, without statutory powers, authorities are reduced to preaching sermons which “are unlikely to be effective when people are being asked to change behaviour which seems to them highly profitable.”
Unlike the Bank of England, the IMF and World Bank are unlikely to be granted statutory powers to prevent financial crises anytime soon. And so if they want FSAPs to not only warn of, but also ward off, risks to the global financial system, then it is clear from the PBoC’s response that they have no choice but to do more to secure the trust and respect of national authorities.
In Asia, where many still blame the Fund for the region’s 1997 financial crisis, that will be no easy task.