Amid developing tensions, the International Monetary Fund’s 2025 Financial Sector Stability Assessment for China arrives at a pivotal juncture. More than a domestic stocktake, it reflects the structural transformation of China’s financial system, marked by increased complexity, persistent contradictions and a steadily expanding global footprint – much of which is mediated by Chinese financial institutions.
This year’s assessment invites further scrutiny of the system’s evolving resilience and policy trade-offs. Having contributed to China’s inaugural Financial Sector Assessment Program in 2010, which played a key role in helping China embark on financial reforms in the following years, I recall one main thing. That is a large but underdeveloped financial system – bank-dominated, policy-directed and functionally insulated from global market signals.
Also among the vulnerabilities were undercapitalised banks, misallocated credit, structural dependence on real estate, opaque risk pricing and the absence of formal resolution protocols. Not only was regulation fragmented, but supervisory authorities also lacked independence and governance frameworks were nascent.
Domestic gains, lingering risks
Fifteen years on, institutional progress is evident as brought out by the 2005 assessment. Risk-based regulation is more embedded. The macroprudential toolkit has matured, with the People’s Bank of China deploying instruments under the Macroprudential Assessment regime. Regulatory oversight now extends to systemically important fintech and nonbank financial conglomerates. Capital markets have deepened, the investor base has broadened and digital finance increasingly intermediates through regulated channels.
The shift from financial repression in 2010 towards selective marketisation has helped to broaden credit allocation and improve price discovery, particularly in corporate and local government financing.
China’s macroprudential regime, however, continues to operate under institutional constraints. Due to administrative overrides and conflicting policy mandates, countercyclical capital buffers, systemic risk surcharges and borrower-based tools work less effectively. Unlike other G20 jurisdictions, China lacks legal independence and transparent, rule-based triggers in macroprudential governance, undermining credibility and market expectations.
Moreover, the financial sector’s growth has created new vulnerabilities. Smaller banks face continuing exposure to deteriorating assets, weak controls and concentration risks from local government vehicles and property developers. Many also struggle with thin margins and mismatched balance sheets.
While the 2025 assessment identifies these problems, it does not quantify the potential chain reactions and stress breaking points that demand attention from China and global finance.
Crisis management and political limits
Resolution frameworks have improved modestly. Deposit insurance – introduced in 2015 – has gained operational traction. Resolution planning and recovery mechanisms are now in place.
Yet critical institutional and legal gaps remain unresolved. The absence of binding bail-in protocols, creditor hierarchy legislation and explicit fiscal backstops continues to undermine the credibility of resolution in the event of a large-scale or cross-sectoral failure. The capacity to resolve distressed but non-systemic entities in a predictable, market-neutral way – without cascading contagion – remains untested.
The 2010 and 2025 assessments call for improved financial transparency, governance and data quality. These are no longer technocratic refinements for China but preconditions for confidence in the financial system and effective macroprudential calibration.
A persistent gap remains in the quality and timeliness of financial disclosures. While credit registry coverage and regulatory consolidation have improved, the 2025 assessment implies systemic opacity is impeding risk pricing, especially for external actors.
Global leverage and surveillance
One aspect where the 2025 assessment could have provided clearer insights into systemic risk arising from China’s expanding global financial footprint.
Since 2010, China has transformed from a net capital importer to a strategic creditor. Through its policy banks, state-owned commercial lenders and bilateral swap arrangements, China finances infrastructure, helps trade settlement and provides development lending across Asia, Africa and Latin America. Renminbi-denominated trade in Asia has grown sharply, while its share in global payments has tripled since 2010. China is also a creditor in the global bond markets, actively funding cross-border public debt.
Yet, the 2025 assessment only cursorily addresses this selective and state-mediated financial globalisation, which operates under capital account controls and geopolitical uncertainty.
As the IMF has already attempted for other internationally active economies, such as Singapore and Switzerland, the 2025 FSSA would have benefitted by going a step ahead and having a dedicated module on cross-border stress transmission, renminbi clearing hubs, the PBOC’s role and sanctions-related financial connectivity risks. That China’s established role as a global liquidity provider and payment system actor is not treated with the same analytical depth represents a missed opportunity.
China’s financial system operates with a distinct duality: functioning as a macroeconomic stabiliser and a policy-driven geoeconomic lever. This creates tensions between market signals and administrative control, liberalisation goals and geopolitical buffers.
While the 2025 FSSA acknowledges this contradiction, it leaves unexplored implications for regulatory coherence and crisis preparedness. The analysis should have moved beyond international standards to recommend approaches better suited to China’s structural uniqueness and its significance in global finance.
Looking forward
What next? China faces three strategic questions. First, can China enforce market discipline in resolving smaller institutions without resorting to implicit guarantees or policy forbearance? Second, is the renminbi’s internationalisation and the financial system’s role driven by genuine competitiveness or administrative design? Third, can monetary, fiscal and financial policy coordination stabilise an aging, debt-heavy and geopolitically vulnerable environment?
China must build on its institutional progress and the policy suggestions noted in the 2025 FSSA while adapting to a more fragmented global financial landscape. The shift from insulation, as pointed out by the IMF in 2010, as well as the shift to sensible integration, as outlined by the IMF in 2025, stays unfinished.
Whether China moves towards transparency and rules-based finance, mindful of its implications for global financial stability, or greater opacity and intervention will profoundly shape its path and role in the international monetary system.
Udaibir Das is a Visiting Professor at the National Council of Applied Economic Research, Senior Non-Resident Adviser at the Bank of England, Senior Adviser of the International Forum for Sovereign Wealth Funds, and Distinguished Fellow at the Observer Research Foundation America. He was previously at the Bank for International Settlements, the International Monetary Fund and the Reserve Bank of India.
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