Chinese banks remain resilient to risks despite growing concern over the health of the country's banking sector, the International Monetary Fund (IMF) said Tuesday.
The global lender said its staff and the Chinese authorities conducted stress tests of the largest 17 commercial banks in China and found most would weather shocks if they occur separately.
The Chinese banks were tested on their resilience toward risks such as a drop in asset quality, a housing market crash, cross-border exposures and changes in the exchange rate regime.
The IMF, however, warned if several of these risks were to occur at the same time, the banking system could be severely impacted.
While the likelihood of a confluence of various shocks within three years is not highly likely, one shock could easily trigger another, it said.
"Significant capital inflows can drive up equity prices and cause a real estate bubble. This could have a direct impact on the balance sheets of local government financing platforms, which are directly dependent on the real estate market due to the link of collateral and capital to land prices," the IMF said in its country report released Tuesday.
"Conversely, a sharp reversal of capital flows would lead to sizable downward corrections in the real estate and equity markets, impairing banks' asset quality, including a potential accumulation of local infrastructure-related non-performing loans."
It said liquidity risks for the Chinese banks in the near future appear to be limited, as larger banks typically recycle liquidity through the interbank markets to smaller banks and other financial institutions.