As the International Monetary Fund (IMF) delivers its latest assessment of China’s economy, the world’s most prominent financial watchdog is grappling with a growing legitimacy crisis. Once viewed as the “lender of last resort” capable of stabilizing economies during global financial upheavals, the IMF’s one-size-fits-all prescriptions have long been criticized, from the Asian financial crisis of 1997-98 to the lead-up to the 2008 “Lehman shock,” and in subsequent market turbulence.
Now, however, the IMF finds its traditional playbook increasingly mismatched with the realities of a rapidly shifting global economy. In an era defined by the unconventional economic policies of US President Donald Trump, the IMF’s neoliberal frameworks—emphasizing fiscal restraint, structural reforms, and market liberalization—risk irrelevance.
From tariffs and economic blackmail to aggressive geopolitical maneuvering, the Trump administration has fundamentally altered the dynamics of global trade, investment, and growth. Economists note that the assumptions underpinning classical trade theories—from Adam Smith’s free-market principles to David Ricardo’s comparative advantage—are under unprecedented strain. The IMF’s latest critique of China must therefore be understood within this broader context of global disruption.
In its most recent review, the IMF voiced concerns over Beijing’s state-driven approach to industrial growth. According to the IMF, China’s substantial support for strategic sectors—estimated at roughly 4% of GDP—is creating global trade distortions. The organization warns that the country’s export-heavy growth model, coupled with deflationary pressures and industrial overcapacity, is creating imbalances that reverberate beyond China’s borders.
“The IMF’s annual review emphasizes that China must transition toward a consumption-led economy,” said IMF executive directors in a Wednesday briefing. They noted that the country’s sizable current-account surplus generates “adverse spillovers to trading partners,” with a portion of the surplus fueled by the real depreciation of the renminbi.
IMF Deputy Director for Asia Pacific Thomas Helbling highlighted one of China’s most pressing internal economic challenges: the unfinished property market. Helbling described these unfinished developments as “the elephant in the room,” pointing to their impact on investor confidence and broader economic stability.
“The hangover from the property boom has not been addressed,” Helbling said. “Ending this crisis is particularly crucial to maintaining confidence and avoiding deeper deflationary pressures.”
The IMF calls for Beijing to implement rapid structural reforms to rebalance its economy toward domestic consumption. This includes central government financing to complete presold, unfinished housing, rebuilding consumer confidence, and strengthening social protection programs to reduce precautionary savings.
“Reorienting China’s growth model requires significant cultural and economic policy transformation,” the IMF directors said. They urged a “comprehensive and more forceful response” combining macroeconomic policy support with structural reforms.
Chi Lo, a strategist at BNP Paribas Asset Management, underscores the importance of fiscal policy in lifting China out of its economic stagnation. “The economy is stuck in a liquidity trap,” Lo said. “Fiscal policy must do the heavy lifting and revive public confidence and demand. Monetary easing can only facilitate this process. The recent recovery of the credit impulse marks a start, but much more is needed.”
Yet progress toward a more consumption-driven domestic economy has been gradual. Experts note that the need to pivot from over-investment toward household spending and consumption predates Xi Jinping’s rise to power in 2013. Despite repeated pledges, the development of broader social safety nets has been slow, leaving households wary of spending or investing amid ongoing uncertainty in the property sector.
Economists argue that robust social safety systems are critical to encouraging households to spend rather than save, a shift necessary to combat deflation and stimulate domestic growth. Laurence Kotlikoff, a Boston University economist, advocates for a “modern version of Social Security” in China: a fully funded, transparent, efficient, fair, and progressive system with personal accounts invested collectively by the government at zero cost to workers.
“The key to transitioning the economy is to get households to spend more and save less,” Kotlikoff said. “This would address deflation and reduce the reliance on export-led growth.”
China’s leadership faces a particular challenge in mobilizing the country’s substantial household savings, estimated at US$22 trillion. Without confidence in social safety nets, households are likely to continue hoarding savings rather than driving consumption, impeding Beijing’s broader economic rebalancing efforts.
Reviving the property sector remains central to stabilizing the economy. Roughly 70% of Chinese household wealth is tied to real estate, making the sector’s performance critical for sustaining spending and maintaining the country’s 5% growth target.
Without credible plans to stabilize the market and reassure investors, deflationary pressures could persist. While deflation is not universally negative—Japan’s experience suggests falling prices can act as a stealth tax cut—China’s situation is more complex. Weak domestic demand, coupled with manufacturing overcapacity and intense price competition, poses risks not only for the domestic economy but also for global trade partners, particularly the United States.
“Stabilizing the property market is essential,” said Helbling. “It would support consumer confidence and underpin China’s broader shift toward a consumption-led growth model.”
The IMF also highlighted the service sector as a critical, underutilized driver of growth. Sonali Jain-Chandra, a senior IMF economist focused on China, emphasized that expanding services could boost domestic demand, create jobs, and promote sustainable economic growth.
“China’s economic development has relied too heavily on investment rather than consumption,” Jain-Chandra said. “Slowing productivity gains and an aging population risk limiting growth further. A balanced policy approach is required to address these challenges.”
Opening up the service sector and implementing policies that stimulate domestic demand could provide a critical counterweight to China’s historically export-driven economy.
The People’s Bank of China (PBOC) also faces pressure to stimulate economic activity through credit expansion. In November, credit growth was weaker than expected, with financial institutions issuing 392 billion yuan (US$57 billion) in new loans, well below the projected 450 billion yuan ($65 billion). Household loans contracted for a second consecutive month, marking the first such occurrence since record-keeping began in 2005. Corporate borrowing similarly remains subdued, with fixed-asset investment declining for the first time since at least 1998.
“We expect credit growth to remain weak over the coming months,” said Leah Fahy, an economist at Capital Economics. The PBOC has signaled it will maintain supportive monetary policy but has stopped short of aggressive intervention, reflecting political sensitivities and concerns that a weaker yuan could exacerbate trade tensions with Washington.
Xi Jinping has emphasized the importance of reducing leverage in the financial sector and curbing reliance on so-called “corporate zombies,” firms sustained by state support despite being unprofitable. Yet, in practice, the PBOC is likely to increase its role in countering deflation in the coming year. The challenge is achieving this without undermining financial stability or exacerbating trade tensions with the United States.
“This is a key issue for Chinese policymakers,” noted Yale economist Stephen Roach. “How should they prioritize the imperatives of consumer-led rebalancing? Reducing excess household savings has far greater potential to boost economic growth than merely increasing wages.”
Roach adds that successful rebalancing could put China on a trajectory toward “convergence of per capita GDP with advanced economies by 2049,” aligning economic performance with the nation’s long-term development goals.
The IMF’s concerns are amplified by ongoing US-China trade tensions. Trump-era tariffs have constrained China’s ability to pivot to a domestic-consumption model, making internal reforms even more urgent. Export-heavy growth, combined with industrial overcapacity and currency adjustments, has drawn criticism from global trading partners, particularly Washington.
Strengthening domestic demand is therefore crucial not only for China but also for global economic stability. A more balanced Chinese economy would reduce the risk of external shocks and trade imbalances, while providing a more resilient engine for global growth.
Economists largely agree on a suite of reforms needed to stabilize China’s economy and bolster global growth:
- Revive the Property Sector – Completing unfinished developments and stabilizing home prices to restore household wealth and confidence.
- Strengthen Social Safety Nets – Building robust, reliable mechanisms to reduce precautionary savings and encourage consumption.
- Expand the Service Sector – Promoting job creation, domestic demand, and economic diversification.
- Implement Complementary Structural Reforms – Streamlining state support for industry while encouraging innovation and market-driven growth.
- Support Monetary and Fiscal Policy Coordination – Using fiscal stimulus to support demand while managing credit growth and financial stability.
Without decisive action, analysts warn, deflationary pressures, over-investment, and weak domestic consumption could continue to weigh on China’s growth. Conversely, successful reform could provide a template for sustainable growth, benefiting both China and the global economy.
The IMF’s warning to China reflects broader concerns about global economic stability in an era of unprecedented volatility. With domestic challenges such as the property crisis, household savings excesses, and an aging population, combined with external pressures from trade tensions and geopolitical uncertainty, Beijing faces a complex balancing act.
Transitioning toward a consumption-driven economy will require bold, credible reforms and the creation of robust social safety nets to instill confidence among China’s 1.4 billion citizens. Stabilizing the property market, expanding the service sector, and coordinating fiscal and monetary policy are all critical to this transformation.
For the IMF, its traditional role as the world’s financial referee is increasingly complicated by the Trump-era disruption of global trade norms. Even as Beijing contemplates reforms, the broader international economic environment remains uncertain. Global observers will be watching closely to see whether China can execute a transition toward domestic-driven growth and whether the IMF’s prescriptions—once considered orthodox—remain relevant in a world where classical economic theories face relentless challenge.
The stakes are enormous. Success could stabilize not only China’s economy but also global growth, while failure risks protracted deflation, slow domestic consumption, and continued tension with key trading partners. For now, the world waits, cautiously, as Beijing charts a course through one of its most challenging economic chapters in decades.
