World Bank censures China for interfering in financial sector

(REUTERS) The World Bank on Wednesday censured China for the state's extensive interference in the financial system, saying it could stoke potential instability unless Beijing undertakes urgent reforms to eliminate distortions in the broader economy. In its China economic update, the bank welcomed the slowdown in Asia's powerhouseeconomy as it showed the growth model was changing for the better, reducing vulnerabilities built up by a credit-fueled bounce that followed the 2008 global financial crisis. But in the 39-page report, the World Bank also criticized the Chinese government for interfering extensively in the financial sector and undermining its own efforts at developing a sound financial system. The extent of state intervention seen in China has "no parallel in modern market economies", the World Bank said. "The state has interfered extensively and directly in allocating resources through administrative and price controls, guarantees, credit guidelines, pervasive ownership of financial institutions, and regulatory policies," it said. Such a distorted role of the state is "the main root cause" for China's fragile financial sector, which the bank described as unbalanced, repressed, costly to maintain and potentially unstable. To that extent, the bank reiterated its call for China to urgently undertake "fundamental reform" as excess capacity, debt levels and financial distress build up in the country. The World Bank restated its forecast for China's economy to grow 7.1 percent this year, before cooling to 7.0 percent next year and to 6.9 percent in 2017. Weighed down by a property downturn, factory overcapacity and local debt, the government has said growth in the economy is expected to slow to a quarter-century low of around 7 percent this year, down from 7.4 percent in 2014. [caption id="attachment_78323" align="alignnone" width="644"] A worker is lit outside a construction site at night in Beijing's central business district, June 24, 2015. REUTERS/Jason Lee[/caption]