(Feb 19): 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 Wednesday released alongside the Washington-based lender’s annual review of China’s economy, known as an Article IV consultation.
In that review, IMF staff 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 matched long-standing criticisms of the US — across multiple administrations — and other developed nations. Its spillover warning also echoed a November assessment by Goldman Sachs Group Inc 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, Zhengxin Zhang, took issue with the criticism, saying in a separate statement that China’s 2025 export growth “was primarily driven by its competitiveness and innovation capacity”, along with front-loading caused by Washington’s trade policy.
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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 release also came amid China’s weeklong lunar 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 that central government funding to deal with the overhang of unfinished properties in China’s crippled property market “would rebuild consumer confidence”.
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After gross domestic product (GDP) growth of 5% in 2025 — a figure that met Beijing’s official target — the IMF sees the expansion slowing to 4.5% this year. Many economists anticipate China will next month set its 2026 target in a 4.5% to 5% 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% of GDP for last year — more than double the 1.5% it had projected in its 2024 annual report. 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% of GDP last year, driven by the record US$1.2 trillion ($1.52 trillion) excess of exported goods over imported ones. Goldman economists have projected China’s surplus to reach almost 1% 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% of China’s GDP in 2030 — still well above an estimated “norm” of 0.9%.
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% undervalued, with its range stretching from 12.1% to 20.7%.
Policy waste
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IMF executive directors called for “greater exchange rate flexibility”. China’s Zhang said Beijing’s currency policy is “clear and consistent”, relying on market forces to play “a decisive role”.
China also took issue with IMF staff 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% of GDP as of 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%.
Staff said that scaling back “unwarranted” industrial policy measures by about 2% of GDP over the medium term would boost productivity, reduce mis-allocation of resources and cut fiscal costs.
The fund highlighted that almost a third of growth last year 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 their ability to stimulate demand.
The fund estimated government debt continued to soar in 2025, totalling almost 127% of GDP — an increase of about 10 percentage points from 2024. That’s forecast to climb to more than 135% this year and continue rising through 2034.
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