As the International Monetary Fund takes China to task, the world’s “lender of last resort” is grappling with a new legitimacy crisis.
It used to be a one-size-fits-all response to financial crackups that earned the IMF global ire. From the 1997-98 Asian financial crisis to the lead-up to the 2008 “Lehman shock” to any number of meltdowns since, the IMF has often given dreadful advice.
The problem now is that the IMF’s neoliberal approach to putting out financial fires doesn’t matter much in the Donald Trump era. With the leader of the globe’s biggest economy upending game boards everywhere, and with accelerating speed, the IMF’s playbook looks as obsolete as any.
Between tariffs, economic blackmail and geopolitical adventurism, Trump 2.0 policies are rendering Adam Smith’s and David Ricardo’s theories less and less applicable to the growth, trade and investment dynamics of the day.
All of which has many economists slapping an asterisk on the IMF’s latest imploring of Beijing to scrap its model of massive state support for its industries, one it claims is undermining global growth and development.
The IMF is right to warn that Beijing’s export-heavy growth strategy is distorting global trade. So is China’s deflation and industrial overcapacity.
The IMF is also correct to warn in its annual review that China’s spending roughly 4% of gross domestic product subsidizing companies in critical sectors is creating imbalances across the world economy.
“Transitioning to a consumption-led growth model should be the overarching priority,” the IMF’s executive directors said Wednesday. The IMF warned that China’s large current-account surplus causes “adverse spillovers to trading partners.” Some of the excess stems from exports getting a boost from “real depreciation of the RMB.”
At the same time, Thomas Helbling, IMF deputy director for Asia Pacific, said unfinished properties and the consequences for Chinese investor confidence remained the “elephant in the room.”
As such, he added, ending China’s giant property crisis is particularly crucial. The economic fallout, Helbling said, suggests the “hangover from the boom has not been addressed.”
The key issue, the IMF says, is that Beijing acts rapidly on “complementary structural reforms that rebalance the economy toward consumption.” These include facilitating a property-sector adjustment, with central government financing to tackle presold, unfinished housing, which would rebuild consumer confidence, while strengthening the social protection system would lower precautionary savings.
“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.”
Chi Lo, strategist at BNP Paribas Asset Management, worries that China’s “economy stuck in a liquidity trap, fiscal policy must do the heavy lifting and revive public confidence and demand. Monetary easing is a facilitating tool. The recent recovery of the credit impulse marks a start on the road to recovery.”
But a shift toward a more vibrant, demand-led domestic economic model continues to be slow-going. The need for a recalibration from over-investment to consumption was well known even before Xi rose to power in 2013. So is the need to create broader safety nets across sectors.
A robust network of safety nets is becoming more important as the property crisis drags on. Why would the average mainland household have the confidence to consume or invest after losing their shirts in the property market and with no recovery in sight?
Building a larger network of stable, trusted safety nets would pay the biggest dividends. As Boston University economist Laurence Kotlikoff argues, the key is crafting a “modern version of Social Security” that’s “fully-funded, transparent, efficient, fair, and progressive” and “features personal accounts that are collectively invested by the government at zero cost to workers.”
The trouble is getting there. Getting households to spend more and save less is key to ending deflation once and for all. It is vital, too, for China to pivot away from its export-heavy growth model.
One of Team Xi’s top pledges is to cajole households into deploying the US$22 trillion in savings they’re sitting on. This, however, requires building a robust, sizable social safety net to encourage consumers to spend more and save less.
In the short run, reviving the property sector would help. With roughly 70% of Chinese household wealth tied to real estate, stabilizing the sector is vital to boosting spending and maintaining 5% economic growth.
Without bold and credible plans to put a floor under real estate and give 1.4 billion Chinese reasons for economic optimism, deflation could continue to fester. It’s a complicated issue, of course. Not all deflation is bad. In Japan, households came to regard sliding prices as a stealth tax cut.
In China’s case, many economists have argued that weak prices could benefit technology companies looking to expand, high-dividend stocks and exporters with diversified businesses.
Still, the manufacturing overcapacity that China is exporting is irking trading partners — particularly the US. And the excessive price competition that Xi is struggling to stamp out at home — so-called “anti-involution” — is taking on a life of its own.
Sonali Jain-Chandra, a top IMF China economist, argues that the key is to accelerate “reforms to rebalance demand toward consumption and further open the service sector, which can promote sustainable growth and help create jobs.”
While “China’s economic development over the last several decades has been remarkable,” it “has relied too much on investment as opposed to consumption,” Jain-Chandra says.
Slowing productivity and an aging population risk limiting growth, which we expect to slow significantly in the coming years. A comprehensive and balanced policy approach is needed to address these challenges.
Given these circumstances, Jain-Chandra says, China’s service sector is an “underexploited driver of growth” needed to revive economic confidence.
There’s an argument, too, that the People’s Bank of China must act more assertively to add liquidity to the economy. In November, credit expansion in Asia’s biggest economy remained subdued. Financial institutions issued just 392 billion yuan (US$57 billion) in new loans, well below expectations of a 450 billion yuan ($65 billion) increase.
In November, household loans contracted for the second consecutive month. It was the first time that happened since Beijing began keeping records in 2005. Corporate borrowing remains lackluster, too. In 2025, fixed-asset investment saw its first annual decline since at least 1998.
“We expect credit growth to remain weak over the coming months,” says economist Leah Fahy at Capital Economics.
Earlier this week, the PBOC signaled it would maintain its supportive monetary policy stance, but not much more. In many ways, the PBOC is limited by political considerations, including fears a weaker yuan might exacerbate trade tensions with Washington.
Xi has long sought to reduce leverage in the financial sector and, at least in theory, provide less aid and comfort to corporate zombies. Yet in the year ahead, odds are high and rising that the PBOC will become more active in battling deflation.
All this makes Xi’s biggest challenge even harder: convincing 1.4 billion mainlanders to save less and spend more. Pulling off this transition requires creating bigger and more robust social safety nets, something Team Xi has so far been slow to do.
“This is a key issue for Chinese policymakers,” notes Yale University economist Stephen Roach. “How should they prioritize the imperatives of consumer-led rebalancing?”
Roach argues, “China has far more to gain from reducing excess saving than from boosting subpar household income.” He notes, “such rebalancing would effectively put China on the rejuvenation trajectory, a growth path that I have previously defined as leading to convergence of per capita GDP for China with that of advanced economies by 2049.”
Trump’s tariffs have made things even harder, of course, complicating China’s ability to pivot to a new growth model and answer the IMF’s reform call. But stronger Chinese domestic demand would go a long way toward rebalancing not just Chinese but global economic growth.
Follow William Pesek on X at @WilliamPesek
