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.

Beijing must loosen its grip, not just on how banks lend but on interest and exchange rates. Only this will make banks robust enough to face shocks similar to those that have convulsed the global financial system.

There may be a temptation in some quarters of Beijing to dismiss the IMF’s warnings as outside interference. But such grandstanding would tarnish the progress already made in reforming China’s still partly closed economy. In fact, many of the IMF’s recommendations simply echoed the direction already set out in the Five Year Plan unveiled last March.

It is also welcome that China has finally opened its doors to IMF monitors, who for several years were barred from conducting such assessments. The fact that certain information was withheld is to be deplored. But, to be fair, China is not the only country to do so.

That said, there remains a reluctance in Beijing to move more quickly on the next stage of reform and this is likely to intensify. It is true that the government needs time to implement deep reform. But the next stage of liberalisation will also mean a loss of political power. That is not something that China’s Communist party appears ready to accept. It should be bolder. The cost of not acting now could impose a higher price later – both economically and politically.