(Repeats story from Dec 7 for technical reasons)
* IMF releases report on stability of China's financial system
* IMF says regulators should reinforce primacy of financial stability over growth
* China should form financial stability sub-committee - IMF
* Under severely adverse scenario, banks may face capital shortfall equal to 2.5 pct of GDP - IMF
By Ryan Woo
BEIJING, Dec 7 (Reuters) - China should prioritise financial stability above development goals, as pursuit of regional growth targets and helping firms avoid heavy job losses had led to a surge in debt, particularly at local government level, the International Monetary Fund said.
Noting a lack of coordination and inadequate systemic risk analysis in a report released on Wednesday, the IMF also recommended the formation of a financial stability sub-committee comprising the central bank and three financial regulatory agencies, and an increase in staff for the banking watchdog.
Since the IMF's last assessment of the Chinese financial sector's resilience to shocks and contagion in 2011, two concerns remain - credit growth remains high and the expansion of wealth management products (WMPs), said Ratna Sahay, deputy director of the IMF's Monetary and Capital Markets Department.
"Risks are large," Sahay told reporters during an online briefing. "Having said that, the authorities are really aware of risks and they are working proactively to contain these risks."
The IMF report said that while China has been taking steps to address its debt risks, reining in excessive credit growth will require a de-emphasis on high GDP projections in national plans that have spurred local governments to set high growth targets.
But the near-term prioritisation of social stability seems to depend on credit growth to sustain financing to firms even when they are non-viable, it said.
"The apparent primary goals of preventing large falls in local jobs and reaching regional growth targets have conflicted with other policy objectives such as financial stability," the report said.
"Regulators should reinforce the primacy of financial stability over development objectives," the fund said.
China's credit-to-gross domestic product (GDP) ratio is very high by global standards and consistent with a high probability of financial distress, the IMF said, citing an estimate from the Bank for International Settlements.
NEW PRODUCTS, NEW RISKS
The IMF specifically warned that the rapid development of financial products for investors could pose grave risks.
"We are also concerned that in a very innovative financial system such as China's, new products can emerge very quickly and very rapidly become large and popular, and potentially a systemic risk," said James Walsh, deputy division chief of the Monetary and Capital Markets Department.