Stay updated with free updates
just sign up Chinese economy myFT Digest – delivered straight to your inbox.
The IMF has called on China to cut state support for industry as international concerns grow over excess capacity in the world’s second-largest economy.
The fund estimates that China spends about 4 percent of its GDP subsidizing companies in key sectors, and said it should reduce it by 2 percentage points in the medium term.
China’s industrial policies are “under increasing international influence and pressure” and combined with weak domestic demand have made China “more dependent on manufacturing exports as a source of growth,” the fund said.
“Industrial policy has enabled technological innovation in some sectors, but overall the impact on the economy has been negative,” said Sonali Jain-Chandra, the IMF’s mission chief for China and Asia Pacific, pointing to “misallocation of resources” and “overspending.”
The fund has previously called on China to ease its industrial policies, but has not given estimates by how much.
The recommendations in the IMF report come after China increased exports of manufactured goods, including high-value items like EVs, increasing tensions with the West over its subsidies.
China’s global trade surplus in goods exceeded $1 trillion last year. World leaders such as France’s Emmanuel Macron have expressed sadness at the “intolerable imbalance” in trade.
The IMF welcomed Beijing’s initiative to reduce “involution”, a term China uses to refer to excessive price competition, but said it should “clarify its strategy”.
Policymakers in China are grappling with challenges including the threat of deflation, weak consumer confidence, high youth unemployment and a persistent property slump, which show few signs of abating.
The IMF called on China to spend 5.5 percent of GDP over four years in 2024 to tackle the property slump by completing unfinished housing and supporting the exit of unviable developers from the sector.
In the report published this week, 5 percent of GDP has been sought from the central government in three years. “The proposal is basically the same,” said Thomas Helbling, the IMF’s deputy director for Asia Pacific, adding that illiquid assets and the consequences for Chinese investor confidence remain the “elephant in the room.”
“The hangover caused by the surge has not been addressed,” he said.
The IMF also urged China to move toward a “consumption-led growth” model for its economy. It recommended that China loosen restrictions on internal migrants’ access to social welfare, move toward a more progressive taxation system, and boost pensions.
In their response to the IMF report, Chinese officials said that their industrial subsidies were not as large as estimated.
Zhang Zhengxin, IMF executive director for China, nominated by the member country, said the country believes estimates of the scale and impact of China’s industrial policy are grossly overstated.
“China’s industrial policies are open and transparent, applying equally to state-owned enterprises, private firms and foreign-invested entities,” Zhang said.
