IMF Urges China to Shift to Consumption-Led Growth, Warns of Risks

The IMF Executive Board, which concluded its 2025 Article IV consultation with China on February 13 (local time), said the economy "has remained remarkably resilient despite facing multiple shocks in recent years."

China's economy grew 5 per cent in 2025. The IMF said growth was "supported by robust exports and policy stimulus." But it noted that "private domestic demand remained lacklustre."

Inflation stayed weak. "Headline inflation continues to be muted, averaging 0 per cent in 2025, and the GDP deflator continued to decline," the IMF said.

Growth is expected to slow this year. "GDP growth is projected to slow to 4.5 per cent in 2026, reflecting the prolonged effects of tariffs and trade policy uncertainty," the Fund said. Inflation is "projected to rise only gradually amid continued economic slack."

The IMF said risks are "tilted to the downside." It warned that "a deeper-than-expected contraction in the property sector" could cause "greater domestic demand weakness, entrenched deflation, and continued reliance on exports." It added that "renewed escalation of trade tensions is the key external downside risk."

Directors said "transitioning to a consumption-led growth model should be the overarching priority." They welcomed China's focus on boosting consumption under its 15th Five-Year Plan. They called for "a comprehensive and more forceful response that combines increased macroeconomic policy support with structural reforms."

The IMF "welcomed the fiscal expansion in 2025." It said "an expansionary stance should be maintained until deflationary pressures subside durably." It added that spending should shift "towards greater support for consumption and the property sector and away from inefficient investment."

The policy mix, it said, "should include further monetary easing and greater exchange rate flexibility."

The IMF urged Beijing to address property sector risks. It called for "central government financing for tackling pre-sold unfinished housing." It also said China should strengthen social protection to "lower precautionary savings."

Directors stressed "the need to scale back unwarranted industrial policy to lower domestic factor misallocation, reduce fiscal costs, and mitigate international spillovers."

On trade, the IMF said China plays an "important role in promoting open trade amid rising fragmentation pressures." It urged authorities "to work constructively with partners to resolve trade disputes and use national security justifications for restricting trade or investment judiciously."

The IMF said long-term debt sustainability will require "significant fiscal consolidation over the long term." But it said this "should only start once the economy has reflated durably." It also called for restructuring local government financing vehicles and strengthening fiscal frameworks.

China is the world's second-largest economy and a major driver of global trade. In recent years, it has faced property sector stress and rising local government debt. Those pressures have prompted targeted stimulus measures even as trade tensions remain elevated.

- IANS