There are vulnerabilities in the financial sector, though the financial a report released on Tuesday, as it called for further reforms. In itsystem is sound overall, the International Monetary Fund (IMF) said ins first formal evaluation of China\'s financial system, the Washington-based lender said China needs to speed up its financial reform. The IMF welcomed improvements in supervision and regulation and the upgrading of banks\' risk management systems. \"China\'s banks and financial sector are healthy, but there are vulnerabilities that should be addressed by the authorities,\" said Jonathan Fiechter, deputy director of the IMF\'s Monetary and Capital Markets Department and the head of the IMF team that conducted the Financial Sector Assessment Program (FSAP). Ba Shusong, deputy head of the Institute of Financial Studies at the Development Research Center of the State Council, told China Daily that the report is generally positive and it is constructive for the development of the financial system.The FSAP was established in 1999 and carries out assessments in developing and emerging market countries. Appraisal work by the FSAP in China started in August, 2009. China is one of the 25 \"systemically important\" countries, including France, Italy and Brazil, that have agreed to mandatory assessments at least once every five years. The central bank, the People\'s Bank of China, said in a statement on its website that although the IMF report was generally objective and positive, there were still several points of view that are not sufficiently comprehensive. \"The government\'s sway over financial markets has already evolved from direct intervention to asserting influence through regulation of financial companies,\" the bank said. More commercially oriented mechanisms will be developed to form interest and exchange rates, the central bank said. According to the IMF, the main near-term risks stem from sharp credit expansion, the rapid increase of off-balance sheet exposures, relatively high real estate prices and imbalanced economic growth. \"If several of the above risks were to occur at the same time, the banking system could be severely impacted,\" said the IMF, after jointly conducting stress tests of the largest 17 commercial banks. \"The banking system\'s non-performing loan ratio has been on a downward trend, reaching 1.1 percent at the end of 2010,\" thanks to strong economic growth and improvements in risk management, the IMF said. But if credit increases more rapidly, it may result in a deterioration of bank asset quality in the coming years, the IMF said. In October, the country\'s new yuan-denominated lending reached 586.8 billion yuan ($92.7 billion), up 17.5 billion yuan from a year earlier. It increased from 470 billion yuan in September, and 548.5 billion yuan in August. Wang Tao, a Hong Kong-based economist at UBS AG, said that new lending may reach 550 billion yuan in each of the last two months of this year, bringing lending in this category in 2011 to 7.3 trillion yuan. Both the growth of credit and money supply are on track for a \"normal\" range after government economic stimulus policies, said Ba with the State Council\'s development research center. \"To prevent over-dependence on bank loans, the central authorities are encouraging diversified financing channels, including non-bank and non-government financing,\" Ba said. \"That is one of the reasons that off-balance sheet lending is increasing.\" He was concerned about the still-imperfect regulatory system that may allow non-performing loans to pressure the financial sector. The banking sector\'s direct exposure to the real estate sector is moderate, about 20 percent, which is relatively low compared with banks in the United States, the report said. \"But the indirect exposure is much higher,\" the IMF report said. Zhang Zhiwei, chief China economist at Nomura International (Hong Kong) Ltd, said that housing investments may fall quickly in the coming month if the world\'s second-largest economy meets a sharp downturn.