The International Monetary Fund (IMF) has urged China to shift its growth model from an export-led approach to one that focuses on stronger domestic consumption.
In its latest World Economic Outlook released Tuesday, the IMF warned that China risks long-term stagnation unless it rebalances its economy to depend less on external demand and more on household spending.
Weak Global Demand Hits Exports
The IMF noted that China’s manufacturing output remains strong, yet global demand has weakened. Prices for exported goods have fallen sharply, resulting in reduced profit margins. Pierre-Olivier Gourinchas, the IMF’s Chief Economist, said that China’s export-driven growth model is losing strength as international demand cools.
The Fund’s warning comes as Western policymakers press for stricter scrutiny of China’s economic strategies. The timing is critical because China’s recovery remains fragile following pandemic disruptions and a deep slump in the property market. Domestic consumption has yet to rebound, and weak consumer confidence continues to weigh on economic growth.
Fragile Recovery and Financial Risks
The IMF described China’s outlook as concerning, citing subdued spending and rising financial risks. The economy is struggling with falling property prices, limited credit demand, and high corporate debt levels. The property sector, once a major driver of wealth, remains under pressure as developers face liquidity shortages and banks carry bad loans.
These challenges have eroded confidence among consumers and businesses. The IMF also warned that Beijing’s heavy investment in strategic sectors such as electric vehicles and renewable energy, while productive, risks misallocating resources and crowding out private firms. This could add fiscal strain and hinder competition.
To address these issues, the IMF recommended what it termed a “transitional fiscal expansion and permanent fiscal recomposition.” This approach would involve short-term government spending to stimulate household consumption, accompanied by a longer-term shift toward social safety nets and income support programs.
Balancing Policy Choices and Trade Tensions
China’s export growth has slowed, with data showing shipments to the United States declined by more than 27% in September compared with the same period a year earlier. Although total exports rose slightly, analysts link the decline in U.S. demand to both weaker global consumption and trade tensions.
The IMF warned that a surge in low-cost Chinese goods, particularly electric vehicles and solar panels, could heighten trade friction with the West. Expanding domestic demand could help absorb excess output and ease these tensions.
Premier Li Qiang has acknowledged the importance of stimulating domestic demand and promised targeted fiscal aid for households and small firms. Economists, however, argue that deeper structural reforms are essential. Raising household income, strengthening social welfare, and supporting private enterprise are considered key to achieving sustainable growth.
IMF Managing Director Kristalina Georgieva reiterated that China must overhaul its growth model to sustain momentum. Without significant reform, the Fund cautioned, China could face a prolonged cycle of low demand, weak prices, and mounting debt.
