The International Monetary Fund (IMF) has issued a pointed warning over China’s state-led growth strategy, arguing that heavy industrial subsidies, debt-fueled investment, and weak domestic consumption are distorting the world’s second-largest economy and generating harmful spillovers abroad.
In a Feb. 18 report concluding its latest Article IV consultation with China, the IMF estimated that Beijing allocated roughly 4 percent of gross domestic product (GDP) in 2023 to support key industries—a level it said has remained broadly stable in recent years.
The Fund cautioned that such policies are “giving rise to international spillovers and pressures,” particularly as excess capacity fuels export growth amid soft domestic demand.
While noting limited official transparency on the full scale of support, IMF staff cited a recent study estimating that priority sectors—primarily high-tech manufacturing—benefit from substantial government backing, including grants, tax incentives, preferential credit, and subsidized land.
The IMF recommended that Chinese authorities reduce what it described as “unwarranted industrial policy support,” calling for a cut of roughly half in state aid to domestic industry.
The Fund said scaling back subsidies would ease fiscal burdens, boost productivity, and help correct widening external imbalances.
“Higher net exports have also resulted in the emergence of external imbalances, with adverse spillovers to trading partners,” the IMF said, warning that China’s size and rising global trade tensions make export dependence an increasingly fragile growth strategy.
Instead, the Fund urged Beijing to pivot decisively toward a consumption-led growth model, combining fiscal support for households with structural reforms. Key recommendations include curbing off-budget investment by local government financing vehicles and slowing debt accumulation.
Absent stronger action, the IMF warned, China faces the risk of slower growth, persistent deflationary pressures, and mounting financial vulnerabilities.
Economists Question Scope of IMF Estimates
Some analysts argue the IMF’s estimates may understate the breadth of state support embedded in China’s economic system.
Michael Pettis, a senior fellow at the Carnegie Endowment for International Peace, said direct fiscal subsidies capture only part of the distortion. Writing Feb. 19 on X, Pettis argued that indirect transfers—such as preferential financing, labor policies, and an undervalued currency—represent significant additional support to manufacturers.
“China spends a lot more than 4 percent of GDP subsidizing critical manufacturing sectors,” Pettis wrote, contending that reducing central-government subsidies alone would have limited impact without broader macroeconomic adjustments.
Similarly, Brad Setser, senior fellow at the Council on Foreign Relations, criticized what he described as thin analysis of China’s exchange-rate management. He argued that the IMF report did not sufficiently address potential “backdoor” foreign exchange intervention through state banks.
Setser also suggested that methodological changes to China’s balance-of-payments reporting may understate the country’s current account surplus.
U.S. Treasury Flags Transparency Concerns
The U.S. Department of the Treasury has stopped short of formally labeling China a currency manipulator but continues to flag concerns about transparency.
In its most recent foreign exchange report, Treasury said China stands out among major trading partners for limited clarity around its currency practices. The department added that the renminbi appears substantially undervalued relative to economic fundamentals and emphasized that authorities should allow the exchange rate to strengthen in line with market forces.
China remains on Treasury’s monitoring list of major trading partners subject to close scrutiny over currency and macroeconomic policies.
The IMF concluded that a comprehensive reform package aimed at strengthening domestic demand and reducing industrial distortions would address both China’s internal imbalances and mounting global trade tensions.
