IMF warns China’s economic policies causing waste at home, damage abroad

BEIJING – The International Monetary Fund (IMF) faulted China’s economic policies for causing waste at home and damage abroad and called for a reorientation by Beijing to embrace a model based on domestic consumer spending.

“Transitioning to a consumption-led growth model should be the overarching priority,” the IMF’s executive directors said in a statement on Feb 18, released alongside its annual review of the Chinese economy.

In that review, the IMF highlighted China’s large current account surplus, which has featured “adverse spillovers to trading partners”. Some of that excess stems from exports getting a boost from “real depreciation of the RMB”, the fund said, referring to the inflation-adjusted weakening of the renminbi, also known as the yuan.

Some of the IMF’s language echoed longstanding criticisms of the US, across multiple administrations, and of other developed nations.

Its spillover warning also echoed a November assessment by Goldman Sachs economists, who said China’s expanding export capacity meant a net negative for the rest of the global economy.

China’s representative on the IMF’s executive board, Mr Zhang Zhengxin, took issue with the criticism, saying in a separate statement that the country’s 2025 export growth was “primarily driven by its competitiveness and innovation capacity”, along with front-loading caused by Washington’s trade policy.

The executive board as a whole, however, called for a major shift in China’s policy framework, making its argument just weeks before the annual gathering of the nation’s National People’s Congress, where specific economic targets will be released for 2026. The statement also came amid the week-long Chinese New Year holiday.

“Reorienting China’s growth model requires significant cultural and economic policy transformation,” the IMF directors said. They called for a comprehensive and more forceful response that combines increased macroeconomic policy support with structural reforms.

Along with “more expansionary” measures, including fiscal stimulus, the directors said central government funding to deal with the overhang of unfinished properties in the crippled property market “would rebuild consumer confidence”.

After gross domestic product (GDP) growth of 5 per cent in 2025 – a figure that met Beijing’s official target – the IMF sees the expansion slowing to 4.5 per cent in 2026. Many economists anticipate that China will in March set its 2026 growth target in a 4.5 per cent to 5 per cent range.

Spotlighting ‘imbalances’

The IMF’s annual report used the term “external imbalances” more than 10 times, compared with no such mentions in the 2024 edition.

The fund estimated China’s current account surplus at 3.3 per cent of GDP for 2025 – more than double the 1.5 per cent it had projected in its 2024 annual report. Mr Zhang said the fund’s figure “appeared excessively large”.

Even so, according to Bloomberg calculations based on preliminary data released last week, the surplus hit 3.7 per cent of GDP in 2025, driven by a record US$1.2 trillion (S$1.5 trillion) excess of exports over imports.

Goldman economists have projected China’s surplus to reach almost 1 per cent of global GDP within as few as three years, the biggest “of any country in recorded history”.

The fund forecasts the surplus will narrow over the medium term to 2.2 per cent of China’s GDP in 2030 – still well above an estimated “norm” of 0.9 per cent. 

The IMF suggested that a weaker yuan, measured in trade-weighted, inflation-adjusted terms, had given Chinese goods an advantage overseas, while imports languished amid subdued domestic demand. Staff estimated the yuan was around 16 per cent undervalued, with a range of 12.1 per cent to 20.7 per cent.

Policy waste

The IMF executive directors called for “greater exchange rate flexibility”.

Mr Zhang said Beijing’s currency policy is “clear and consistent”, relying on market forces to play “a decisive role”. China also took issue with estimates of the scale and wastefulness of Beijing’s industrial policies. 

The fund calculated that the fiscal cost of government measures for priority sectors amounted to about 4 per cent of GDP as at 2023. While “international comparison is difficult”, the fund noted that European Union state aid in 2022 was less than half that figure, at about 1.5 per cent.

Staff said scaling back “unwarranted” industrial policy measures by about 2 per cent of GDP over the medium term would boost productivity, reduce misallocation of resources and cut fiscal costs.

The fund highlighted that almost a third of growth in 2025 was from net exports. That reliance has “triggered overcapacity concerns, which ultimately can motivate trade actions from partners and put China’s exports at risk”, the report said.

The IMF also expressed serious concern about the continued drop in prices in China and its damage to the economy, with the words “deflation” or “deflationary” appearing more than 60 times in the report.

“Empirical evidence suggests that deflationary pressures are in part related to the demand slump, including from the protracted property sector correction,” the IMF said, also highlighting large local government debt loads that limit the authorities’ ability to stimulate demand.

The fund estimated that government debt continued to soar in 2025, totalling almost 127 per cent of GDP – an increase of about 10 percentage points from 2024. That is forecast to climb to more than 135 per cent in 2026 and continue rising through 2034. BLOOMBERG