When the global financial crisis struck in 2008, China’s financial sector was in relatively good shape. Years of gradual reform and the government-led transition towards a more commercially oriented system saw improvements in the structure, transparency and oversight of financial institutions. But the risk is that, in a global sector changing at lightning speed, reform is not moving fast enough.

The warning bells were sounded this week by the International Monetary Fund’s inaugural report on the Chinese financial system. While acknowledging the progress made so far, the IMF highlights a “steady build-up in vulnerabilities” that stem from Beijing’s continued iron grip on its banking sector and which should be taken seriously by government authorities.

These include the growing complexity of the financial system, in part due to previous reforms. It also cites the rise of shadow banking, and distortions in capital allocation created by the government’s still dominant role in dictating banks’ lending policies. In effect the government has been using the financial system to fund public expenditure, thus raising the risk of hidden deficits and unexpected contingent liabilities.