International Monetary Fund Managing Director Kristalina Georgieva delivered a message that resonated far beyond China’s capital — and uncomfortably linked China’s economic trajectory with Japan’s painful past during a recent visit to Beijing. Her remarks, aimed squarely at President Xi Jinping’s leadership team, underscored growing global concern that the world’s second-largest economy is drifting toward a prolonged period of deflation, debt overhangs and stagnation reminiscent of Japan’s “lost decades.”
Georgieva urged Beijing to make what she called the “brave choice” of accelerating structural reforms to shift China away from its long-standing dependence on exports and investment, toward a consumption-led growth model. Central to that transition, she stressed, is ending the prolonged property crisis that continues to drag down prices, confidence and household spending.
“China is simply too big to generate much more growth from exports,” Georgieva told reporters, warning that continued reliance on export-led growth risks intensifying global trade tensions. “It requires brave choices and determined policy action.”
Her most pointed intervention came when she raised the specter of “Japanification” — the slow-burning economic malaise Japan endured after its asset bubble burst in the early 1990s. Georgieva urged Chinese authorities to allow unviable property developers and firms to fail, rather than keeping them afloat through endless credit rollovers.
“We have been urging more attention for closure on this problem,” she said, referring to so-called zombie firms. “Let the zombies go away.”
The comparison with Japan is sensitive in Beijing. Chinese officials often argue the parallels are overstated. Japan’s deflationary trap, after all, was the result of decades of accumulated bad loans, policy missteps and a deeply impaired banking system. China’s property crisis, by contrast, emerged largely after the pandemic, following years of rapid expansion and tightening regulatory controls.
Yet economists note that Japan’s experience offers a clear lesson: the longer debt overhangs and insolvent firms are allowed to linger, the more deeply deflation becomes embedded. China’s falling prices are now approaching a fourth consecutive year, raising alarms both domestically and abroad.
A critical challenge for Beijing is perception. It is entirely possible that Xi Jinping and Premier Li Qiang are acting decisively behind the scenes to stabilize the property sector and shore up growth. But verbal assurances alone no longer suffice. Chinese households and global investors increasingly fear that policymakers are underestimating the risk of a Japan-style lost decade.
Restoring confidence is essential to reversing deflation. One of Beijing’s headline goals has been to encourage households to spend more of the estimated US$22 trillion in savings they are hoarding. Achieving that, however, requires far more than slogans. It demands a stronger social safety net — including better healthcare, pensions and unemployment support — to reduce precautionary saving and boost consumption.
Reviving the property sector is equally critical. Roughly 70% of Chinese household wealth is tied up in real estate, making a sustained housing downturn a direct hit to consumer confidence. Without credible measures to stabilize property prices and balance sheets, efforts to maintain around 5% economic growth will remain under strain.
Deflation, to be sure, is not universally harmful. In Japan, years of falling prices were often viewed by consumers as a stealth tax cut. Today, however, Japan faces the opposite problem, with inflation running near 3% and living standards squeezed by stagnant wages — prompting some households to nostalgically recall the deflation era.
In China, some economists argue that weak prices can benefit technology firms, exporters with diversified markets and investors in high-dividend stocks. But the broader consequences are proving destabilizing. China’s overcapacity is spilling into global markets, angering trading partners — particularly the tariff-wielding United States. At home, brutal price competition, which Xi has sought to curb through an “anti-involution” campaign, is intensifying rather than easing.
The risk of zombie firms looms large. A recent study by the Federal Reserve Bank of Dallas found mounting evidence of “zombie lending” in China, with banks rolling over bad loans to unprofitable firms instead of recognizing losses. Economists Scott Davis and Brendan Kelly argue that China’s current experience mirrors Japan’s in the 1980s and 1990s, when zombie lending led to inefficient capital allocation and falling productivity.
While Beijing’s anti-involution drive targets manufacturing, the Dallas Fed warns that the services sector — crucial for boosting consumption and employment — may harbor an equally serious zombie problem, especially as subsidized loans continue to flow.
IMF economist Sonali Jain-Chandra says the solution lies in accelerating reforms that rebalance demand toward consumption and open the services sector further. China’s growth model, she notes, has relied too heavily on investment, leaving productivity vulnerable as the population ages.
Monetary policy alone cannot solve the problem. Credit growth remains weak, household borrowing is contracting, and fixed-asset investment is heading toward its first annual decline in decades. While the People’s Bank of China has pledged to maintain supportive policies, it remains constrained by political concerns, including fears that a weaker yuan could inflame trade tensions.
Without bold structural reforms to clean up developers’ balance sheets, eliminate zombie firms and shift incentives toward consumption, China risks remaining trapped in deflation. As 2025 draws to a close, the warning from the IMF and global economists is clear: time is running out for Beijing to avoid a fate it has long insisted could never be its own.
