As the International Monetary Fund takes China to task, the world\u2019s \u201clender of last resort\u201d is grappling with a new legitimacy crisis.<\/p>\n
It used to be a one-size-fits-all response to financial crackups that earned the IMF global ire. From the 1997-98 Asian financial crisis to the lead-up to the 2008 \u201cLehman shock<\/a>\u201d to any number of meltdowns since, the IMF has often given dreadful advice.<\/p>\n The problem now is that the IMF\u2019s neoliberal approach to putting out financial fires doesn\u2019t matter much in the Donald Trump era. With the leader of the globe\u2019s biggest economy upending game boards everywhere, and with accelerating speed, the IMF\u2019s playbook looks as obsolete as any.<\/p>\n Between tariffs, economic blackmail and geopolitical adventurism, Trump 2.0 policies are rendering Adam Smith\u2019s and David Ricardo\u2019s theories less and less applicable to the growth, trade and investment dynamics of the day.<\/p>\n All of which has many economists slapping an asterisk on the IMF\u2019s latest imploring of Beijing to scrap its model of massive state support for its industries, one it claims is undermining global growth and development.<\/p>\n The IMF is right to warn that Beijing\u2019s export-heavy growth strategy is distorting global trade. So is China\u2019s deflation and industrial overcapacity.<\/p>\n The IMF is also correct to warn in its annual review that China\u2019s spending<\/a> roughly 4% of gross domestic product subsidizing companies in critical sectors is creating imbalances across the world economy.<\/p>\n \u201cTransitioning to a consumption-led growth model should be the overarching priority,\u201d the IMF\u2019s executive directors said Wednesday. The IMF warned that China\u2019s large current-account surplus causes \u201cadverse spillovers to trading partners.\u201d Some of the excess stems from exports getting a boost from \u201creal depreciation of the RMB.\u201d<\/p>\n At the same time, Thomas Helbling, IMF deputy director for Asia Pacific, said unfinished properties and the consequences for Chinese investor confidence<\/a> remained the \u201celephant in the room.\u201d<\/p>\n As such, he added, ending China\u2019s giant property crisis is particularly crucial. The economic fallout, Helbling said, suggests the \u201changover from the boom has not been addressed.\u201d<\/p>\n The key issue, the IMF says, is that Beijing acts rapidly on \u201ccomplementary structural reforms that rebalance the economy toward consumption.\u201d These include facilitating a property-sector adjustment, with central government financing to tackle presold, unfinished housing, which would rebuild consumer confidence, while strengthening the social protection system would lower precautionary savings.<\/p>\n \u201cReorienting China\u2019s growth model requires significant cultural and economic policy transformation,\u201d the IMF directors said. They \u201ccalled for a comprehensive and more forceful response that combines increased macroeconomic policy support with structural reforms.\u201d<\/p>\n Chi Lo, strategist at BNP Paribas Asset Management, worries that China\u2019s \u201ceconomy stuck in a liquidity trap<\/a>, fiscal policy must do the heavy lifting and revive public confidence and demand. Monetary easing is a facilitating tool. The recent recovery of the credit impulse marks a start on the road to recovery.\u201d<\/p>\n But a shift toward a more vibrant, demand-led domestic economic model continues to be slow-going. The need for a recalibration from over-investment to consumption was well known even before Xi rose to power in 2013. So is the need to create broader\u00a0safety\u00a0nets<\/a>\u00a0across sectors.<\/p>\n A robust network of safety nets is becoming more important as the property crisis drags on. Why would the average mainland household have the confidence to\u00a0consume or invest after losing their shirts in the property market and with no recovery in sight?\u00a0<\/p>\n Building a larger network of stable, trusted\u00a0safety\u00a0nets would pay\u00a0the biggest dividends<\/a>. As Boston University economist Laurence Kotlikoff argues, the key is crafting a \u201cmodern version of Social Security\u201d that\u2019s \u201cfully-funded, transparent, efficient, fair, and progressive\u201d and \u201cfeatures personal accounts that are collectively invested by the government at zero cost to workers.\u201d<\/p>\n The trouble is getting there. Getting households to spend more and save less is key to ending deflation once and for all. It is vital, too, for China<\/a> to pivot away from its export-heavy growth model.<\/p>\n One of Team Xi\u2019s top pledges is to cajole households into deploying the US$22 trillion in savings they\u2019re sitting on. This, however, requires building a robust, sizable social safety net to encourage consumers to spend more and save less.<\/p>\n In the short run, reviving the property sector would help. With roughly 70% of Chinese household wealth tied to real estate, stabilizing the sector is vital to boosting spending and maintaining\u00a05% economic growth<\/a>.<\/p>\n Without bold and credible plans to put a floor under real estate and give 1.4 billion Chinese reasons for economic optimism, deflation could continue to fester. It\u2019s a complicated issue, of course. Not all deflation is bad. In Japan, households came to regard sliding prices as a stealth tax cut.<\/p>\n In\u00a0China\u2019s case<\/a>, many economists have argued that weak prices could benefit technology companies looking to expand, high-dividend stocks and exporters with diversified businesses.<\/p>\n Still, the manufacturing overcapacity that China is exporting is irking trading partners \u2014 particularly the US. And the excessive price competition that Xi is struggling to stamp out at home \u2014 so-called \u201canti-involution\u201d \u2014 is taking on a life of its own.<\/p>\n Sonali Jain-Chandra, a top IMF China economist, argues that the key is to accelerate \u201creforms to rebalance demand toward consumption and further open the service sector, which can promote sustainable growth and help create jobs.\u201d<\/p>\n While \u201cChina\u2019s economic development over the last several decades has been remarkable,\u201d it \u201chas relied too much on investment as opposed to consumption,\u201d Jain-Chandra says.<\/p>\n Slowing productivity and an aging population risk limiting growth, which we expect to slow significantly in the coming years. A comprehensive and balanced policy approach is needed to address these challenges.<\/p>\n Given these circumstances, Jain-Chandra says, China\u2019s service sector is an \u201cunderexploited driver of growth\u201d needed to revive economic confidence.<\/p>\n There\u2019s an argument, too, that the\u00a0People\u2019s Bank of China<\/a>\u00a0must act more assertively to add liquidity to the economy. In November, credit expansion in Asia\u2019s biggest economy remained subdued. Financial institutions issued just 392 billion yuan (US$57 billion) in new loans, well below expectations of a 450 billion yuan ($65 billion) increase.<\/p>\n In November, household loans contracted for the second consecutive month. It was the first time that happened since Beijing began keeping records in 2005. Corporate borrowing remains lackluster, too. In 2025, fixed-asset investment saw its first annual decline since at least 1998.<\/p>\n \u201cWe expect credit growth to remain weak over the coming months,\u201d says economist Leah Fahy at Capital Economics.<\/p>\n Earlier this week, the PBOC signaled it would maintain its supportive monetary policy stance, but not much more. In many ways, the PBOC is limited by political considerations, including fears a weaker yuan might exacerbate trade tensions with Washington.<\/p>\n Xi has long sought to reduce leverage in the financial sector and, at least in theory, provide less aid and comfort to corporate zombies. Yet in the year ahead, odds are high and rising that the PBOC will become more active in\u00a0battling deflation<\/a>.<\/p>\n All this makes Xi\u2019s biggest challenge even harder: convincing 1.4 billion mainlanders to save less and spend more. Pulling off this transition requires creating bigger and more robust\u00a0social\u00a0safety\u00a0nets, something Team Xi has so far been slow to do.<\/p>\n \u201cThis is a key issue for Chinese policymakers,\u201d notes Yale University economist Stephen Roach. \u201cHow should they prioritize the imperatives of consumer-led rebalancing?\u201d<\/p>\n Roach argues, \u201cChina has far more to gain from reducing excess saving than from boosting subpar household income.\u201d He notes, \u201csuch rebalancing would effectively put China on the\u00a0rejuvenation trajectory, a growth path that I have previously defined as leading to convergence of per capita GDP for China<\/a> with that of advanced economies by 2049.\u201d<\/p>\n Trump\u2019s tariffs have made things even harder, of course, complicating China\u2019s ability to pivot to a new growth model and answer the IMF\u2019s reform call. But stronger Chinese domestic demand would go a long way toward rebalancing not just Chinese but global economic growth.<\/p>\n Follow William Pesek on X at @WilliamPesek<\/p>\n","protected":false},"excerpt":{"rendered":"As the International Monetary Fund takes China to task, the world\u2019s \u201clender of last resort\u201d is grappling with…\n","protected":false},"author":2,"featured_media":294659,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[11],"tags":[22128,138,69908,162680,69909,128016,120194,162681,219,27464,111,139,69,4421],"class_list":{"0":"post-294658","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-economy","8":"tag-block-2","9":"tag-business","10":"tag-china-deflation","11":"tag-china-domestic-demand","12":"tag-china-economy","13":"tag-china-overcapacity","14":"tag-china-property-crisis","15":"tag-china-safety-nets","16":"tag-economy","17":"tag-international-monetary-fund","18":"tag-new-zealand","19":"tag-newzealand","20":"tag-nz","21":"tag-peoples-bank-of-china"},"_links":{"self":[{"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/posts\/294658","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/comments?post=294658"}],"version-history":[{"count":0,"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/posts\/294658\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/media\/294659"}],"wp:attachment":[{"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/media?parent=294658"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/categories?post=294658"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/tags?post=294658"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}