IMF Urges China to Rebalance Economy, Citing Domestic Waste and Global Spillovers

The International Monetary Fund (IMF) has issued a significant warning regarding China's economic trajectory, concluding its 2025 Article IV consultation on February 13, 2026, and releasing its annual review on February 18, 2026. The global financial institution criticized China's current economic policies for generating 'domestic waste' and causing 'damage abroad,' advocating for a fundamental shift towards a consumption-led growth model.

Call for Consumption-Led Growth

The IMF's executive directors emphasized that 'Transitioning to a consumption-led growth model should be the overarching priority' for China. This recommendation comes as the IMF projects China's GDP growth to slow to 4.5% in 2026, down from 5% in 2025. IMF Managing Director Kristalina Georgieva had previously urged Chinese policymakers to make the 'brave choice' of accelerating structural reform and reducing the economy's reliance on exports.

Concerns Over External Imbalances and Overcapacity

A central point of the IMF's critique is China's substantial current account surplus, which has led to 'adverse spillovers to trading partners.' The fund noted that part of this surplus stems from the 'real depreciation of the RMB,' referring to the inflation-adjusted weakening of the Renminbi, also known as the yuan. The IMF estimates the Renminbi to be undervalued by approximately 16%, contributing to the competitiveness of Chinese exports. This reliance on exports has triggered 'overcapacity concerns,' which could 'motivate trade actions from partners and put China's exports at risk.'

Domestic Economic Challenges

Domestically, the IMF highlighted several pressing issues:

• Weak domestic demand: Private domestic demand has remained lackluster, contributing to deflationary pressures. Headline inflation averaged 0% in 2025, with the GDP deflator continuing to decline.
• Industrial policy waste: The IMF quantified 'policy waste' from industrial subsidies at roughly 4% of GDP, a figure significantly higher than the European Union's comparable state aid expenditure of about 1.5% in 2022. The fund recommended scaling back 'unwarranted' industrial policy measures by about 2% of GDP.
• High government debt: China's government debt is nearing 127% of GDP in 2025.
• Property sector contraction: A 'deeper-than-expected contraction in the property sector' is identified as a primary domestic risk, potentially exacerbating weak domestic demand and entrenched deflation.

China's Response and IMF Recommendations

Mr. Zhang Zhengxin, China's representative on the IMF's executive board, contested some of the criticisms, stating that the country's 2025 export growth was 'primarily driven by its competitiveness and innovation capacity,' alongside 'front-loading caused by Washington's trade policy.' Despite this, the IMF's executive board called for a major shift in China's policy framework. The fund recommended a more forceful policy package, including fiscal stimulus focused on supporting consumption and the property sector, and moving away from inefficient investment. While welcoming the focus on boosting consumption in China's 15th Five-Year Plan (2026-30), the IMF urged authorities to 'do more' to achieve this transition.