China must trade in its export model to survive
IMF warns that the world’s second-largest economy needs to increase consumption and domestic demand
China has been warned that flooding the world with cheap exports is fueling trade tensions. In its annual report, the International Monetary Fund or IMF estimated that Beijing spent up to 4% of GDP to prop up companies in critical sectors, such as EVs and green energy tech.
The growth-model shift has further strained international relations as the world’s second-largest economy struggles with anemic domestic demand after the crippling property crash in 2022. Yet Beijing’s industrial policy based on state subsidies is unsustainable.
“[It is] giving rise to international spillovers and pressures … [as China becomes] more reliant on manufacturing exports as a source of growth. [Instead, it needs to] do more to increase consumption and domestic demand for years to come,” the IMF reported this week.
“Industrial policy has enabled tech innovation in some sectors, but overall the [economic] impact has been negative,” Sonali Jain-Chandra, the IMF mission chief for China and the Asia Pacific, told the Financial Times, pointing to “resource misallocation” and “overspending.”
Pivoting to consumption-led growth the overarching policy priority.
International Monetary Fund
Behind the news:
- The IMF review of China comes at a time when the domestic economy is in serious trouble. Spending has been strangled by high unemployment among the young.
- Shrinking consumer demand has triggered deflationary pressure after household wealth evaporated during the boom to bust property years.
Delve deeper: Stagnating salaries have only added to the gloom, with Beijing rolling out a massive state-led export drive to keep GDP growth of 5% from tanking. Last year, China racked up a record US$1.2 trillion trade surplus.
Between the lines: An artificially low currency is another problem. “The [yuan] is so deeply undervalued, the strengthening we project would still leave [it] comfortably in inexpensive territory,” Goldman Sachs strategist Teresa Alves wrote in a recent note.
Big picture: Yet China cannot count on “ever higher exports to drive durable growth” in the future. Tariffs and protectionism have changed world trade. “That makes pivoting to consumption-led growth the overarching policy priority,” the IMF stated.
China Factor comment: In the end, the country’s policymakers need to quickly move towards a domestic “first” model. Without a massive rebound in consumer spending, the omens look distinctly ominous.