The International Monetary Fund (IMF) has called for China to reform its financial system, asserting that state-run banks are healthy but there are vulnerabilities that should be addressed.

“China’s banks and financial sector are healthy, but there are vulnerabilities that should be addressed by the authorities,” Deputy Director of the IMF’s Monetary and Capital Markets Department, Mr Jonathan Fiechter, said in a statement.

Mr Fiechter headed the team that conducted the IMF’s first Financial Sector Assessment Programme (FSAP) review jointly with the World Bank.

“While the existing structure fosters high savings and high levels of liquidity, it also creates the risk of capital misallocation and the formation of bubbles, especially in real estate. The cost of such distortions will only rise over time, so the sooner these distortions are addressed, the better,” Mr Fiechter said.

While significant progress has been made toward developing a more commercially-oriented financial sector and supervision and regulation are being strengthened, risks stem from the growing complexity of the system and the uncertainty surrounding the global economy, it said.

Further reforms are needed to support financial stability and encourage strong and balanced growth, the IMF said in its first formal evaluation of China’s financial sector.

China is one of the systemically important countries that have agreed to carry out mandatory assessments of its financial system at least once every five years.

Medium-term vulnerabilities are also building up and could impair the prospects for reorientation of the financial system to support the country’s future growth, the IMF said.

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