BEIJING –The International Monetary Fund (IMF) said on Tuesday that China's financial system is stable and sound.

China has made remarkable progress in the reform financial sector, according to the research report of the Financial Sector Assessment Program (FSAP) released on the IMF website.

The FSAP program is the joint responsibility of the IMF and World Bank in developing and emerging market countries, which was established in 1999. It is a comprehensive and in-depth analysis of a country's financial sector. To date, more than three-quarters of the member countries have undergone assessments.

The appraisal work of FSAP in China started in August 2009. It was the first comprehensive financial system stability assessment conducted by the IMF and World Bank in the country.

"Improvements continue to be made to the structure, performance, transparency, and oversight of financial institutions and markets. As a result, the financial sector entered the global financial crisis from a position of relative strength," said the IMF.

The IMF said that over the past three decades, China has maintained high growth rates, its productivity growth has been rapid, and its commercial banking sector has also grown rapidly and become more diversified.

Meanwhile, the Washington-based international financial institution said that further reforms are needed to promote financial stability and sustainable growth.

"China's financial system is robust overall, but faces a steady build-up in vulnerabilities. Further reforms are needed to support financial stability and encourage strong and balanced growth," it said.

"China's financial supervision and regulation are being strengthened, but risks stem from the growing complexity of the system and the uncertainties surrounding the global economy," it added.

Jonathan Fiechter, deputy director of the IMF's Monetary and Capital Markets Department and head of the IMF team that conducted the FSAP, said that China's banks and financial sector are healthy but face vulnerabilities "that should be addressed by the authorities."

According to the report, China's financial sector is confronting several near-term risks, including deterioration in loan quality due to rapid credit expansion, growing disintermediation by shadow banks and off-balance sheet exposures, a downturn in real estate prices, and the uncertainties of the global economic scenario.

In the medium-term, China is to reorient its financial system to support the country's future growth, which may "pose additional risks," said the IMF.

The report also revealed that stress tests conducted jointly by the IMF and Chinese authorities showed that most of China's largest 17 commercial banks appear to be resilient to isolated shocks, which include a sharp deterioration in asset quality (including a correction in the real estate markets), shifts in the yield curve and changes in the exchange rate.

But if several of these risks were to occur at the same time, however, the banking system could be severely impacted, the report warned.

It suggested that China make further reforms to strengthen its financial sector, including taking steps to broaden financial markets and services, reorienting the government's role in the banking system, expanding the use of market-based monetary policy instruments, and upgrading the financial infrastructure and legal frameworks.

China is one of the 25 "systemically important" economies that have agreed to mandatory assessments at least once every five years. The FSAPs are part of the IMF's activities in financial surveillance and the monitoring of the international monetary system.

Other economies subject to FSAPs include Brazil, Britain, Hong Kong, France, Germany, Italy, Japan, Russia and the United States.