Hello everyone, and welcome to this special IMF press conference focused on the 2025 China Article IV mission, our annual assessment of the Chinese economy. I'm Ting Yan from the IMF's Communications Department, and I'm thrilled to be joined by our esteemed speakers: Kristalina Georgieva, Managing Director of the IMF; Krishna Srinivasan, Director of the Asia and Pacific Department; and Sonali Jain-Chandra, our China Mission Chief.
We've just released a press release on the mission's preliminary findings, which you can find on imf.org. Today, we'll delve into the key takeaways and insights from this assessment.
China's Economic Resilience: A Story of Growth and Challenges
Despite facing significant shocks, China's economy has demonstrated remarkable resilience. Our updated projections show an impressive growth rate of 5% in 2025 and 4.5% in 2026, an upward revision from our previous estimates. This resilient growth has had a positive impact on household incomes, especially important during a time of weak consumer confidence. China's contribution to global growth is substantial, accounting for approximately 30% of the total.
However, this outlook also presents an opportunity for the Chinese authorities to address the pressing challenges facing their economy. The authorities are aware of these issues and are taking steps in the right direction, but we encourage them to accelerate their efforts and act with greater urgency.
The Weakness of Domestic Demand: A Shaky Property Sector and Its Impact
One of the key concerns is the persistent weakness in domestic demand, partly due to the unstable nature of the property sector. This has led to depressed consumer confidence, resulting in weak consumption and deflationary pressures. Lower inflation compared to trading partners has caused a significant depreciation of the real exchange rate, making China's exports cheaper and prolonging an excessive reliance on exports, which exacerbates external imbalances.
As the world's second-largest economy, China's size makes it challenging to generate substantial growth solely from exports. Continuing to depend on export-led growth could further escalate global trade tensions. Additionally, slowing productivity growth, high corporate and public debt levels, decreasing returns on investment, and an aging population all contribute to a slower growth trajectory.
Prioritizing Consumption and Reorienting the Economy: A Bold Move
Recognizing these challenges, the authorities have prioritized increasing consumption as a driver of growth in their 15th Five-Year Plan. They also understand the importance of shifting the economy's focus from goods to services. This pivot towards consumption is a crucial policy priority for China.
The authorities have already taken steps to boost domestic consumption, including adopting an expansionary fiscal stance, easing monetary policy, and implementing targeted measures to reduce excess savings and address involution. They've also gradually increased the retirement age, which will help expand the labor supply and improve medium-term growth prospects. Additionally, they've increased subsidies for the elderly for childcare, aiming to boost the services sector.
However, more needs to be done. During our discussions, we recommended implementing more forceful measures with greater urgency. Let's delve into three key areas of focus:
1. Tackling Domestic Imbalances and Deflationary Pressures:
To address these issues, even more expansionary macroeconomic policies are required, coupled with necessary reforms to reduce excess savings. We suggest a comprehensive macroeconomic policy package focused on additional fiscal stimulus, supported by further monetary policy easing, and greater exchange rate flexibility.
Fiscal policy should prioritize strengthening the social protection system, giving people the confidence and security to spend more and save less. Our analysis indicates that increasing social spending, particularly in rural areas, and accelerating Hukou reforms to provide migrant workers with access to social benefits could boost consumption by up to 3% of GDP in the medium term.
At the same time, public investment and industrial policies supporting selected firms and sectors should be scaled back. This would enhance productivity by improving resource allocation and allowing market forces to take the lead. Reducing industrial policy support would also generate fiscal savings, which could be redirected to increase social spending and resolve real estate sector problems.
2. Structural Reforms for Medium-Term Growth:
We recommend reducing regulatory burdens, lowering barriers to internal trade, especially in the services sector, creating a level playing field among firms, and implementing labor market measures to reduce skill mismatches and youth unemployment. These reforms will also help harness the full potential of new technologies, particularly in artificial intelligence and energy efficiency. China's digital infrastructure is well-prepared to benefit from AI, but we must be cautious to mitigate labor market disruptions and guard against new financial stability risks.
3. Addressing High Domestic Debt Levels:
Years of high investment have resulted in high public and corporate debt, leading to elevated risks. While the government's debt swap program provides short-term relief, unsustainable local government debt needs to be restructured to minimize long-term costs. This should be combined with reforms to strengthen financial sector oversight, enhance fiscal discipline, and improve transparency.
The Benefits of Progress: A Brighter Future for China and the World
By making substantial progress in these three essential priorities, we calculate that China's GDP could increase by approximately 2.5% by 2030, creating an additional 18 million jobs and reducing deflationary pressures. It would also lead to an appreciation of the real exchange rate and a smaller current account deficit. A more balanced Chinese economy, both internally and externally, would contribute to a stronger and healthier global economy.
In summary, China has the opportunity to reach a new stage of development, where its growth engines shift from investment and exports to domestic consumption, and its economy reorients from goods to services. It's a significant opportunity that requires bold choices and determined policy action. We strongly support China's efforts to seize this opportunity, and we look forward to continuing our constructive engagement with the Chinese authorities.
Now, let's open the floor to your questions. Please raise your hands and introduce yourselves with your name and media organization. Keep your questions brief, and we'll aim to address as many as possible.
Q&A Session:
Question 1: Managing Director, how do you assess China's growth potential for 2026, especially as it deepens its pursuit of high-quality development and adapts to the global trade landscape?
Ms. Georgieva: We've upgraded our growth projections for both 2025 and 2026. For 2026, we expect growth to be 4.5%, which is slightly lower than our projection for 2025. This slowdown is anticipated due to falling exports in an environment of higher trade tensions and the time needed for domestic sources of growth to take effect.
China's economy is vast, and changing its course takes time. We expect domestic consumption and investments to remain somewhat weaker in 2026. However, 4.5% growth is still significantly higher than our global growth projection of 3.2% for that year. China's resilience is expected to continue in 2026.
Question 2: China has proposed a new five-year plan. What are your major areas of focus, and what new ideas and opportunities do you expect to shape China's future?
Ms. Georgieva: China has an impressive track record, and the 14th Five-Year Plan had clear goal targets and objectives. The implementation has been strong, with China's long tradition of setting objectives and creating incentives across the country to achieve them.
For the 15th Five-Year Plan, China emphasizes three key aspects: high-quality growth, moving towards a moderately developed economy status by 2035 in terms of GDP per capita, and shifting the economy from export-investment driven to domestic consumption-driven. We'll assess these objectives further as more details emerge.
We strongly support China's determination to change its growth model. China is now too big to rely solely on exports for further growth, and its 1.4 billion people present a vast domestic market with significant growth potential.
I'd like to address the young journalists in the audience. China counts on you, the younger generation, to drive domestic demand. Help your older family members change their mindset towards spending and saving, as it's patriotic to boost China's domestic consumption rate.
Question 3: Your latest statement projects China's current account surplus at 3.3% of GDP this year. Based on last year's surplus, the IMF estimated the yuan was undervalued by 8.5%. What does this mean for your current assessment, and did you recommend any action to the Central Bank regarding the exchange rate?
Ms. Georgieva: In our latest External Sector Report, we concluded that China's external position in 2024 was moderately stronger than implied by medium-term fundamentals and desirable policies. For 2025, the current account surplus has increased further, and we'll provide our assessment in the upcoming 2025 Report.
We don't see a significant difference, and our policy recommendations will be similar to our last External Sector Report. We advocate for a flexible exchange rate based on fundamentals, allowing for movement in both directions. We haven't explicitly recommended appreciating the Renminbi, but we want to see a market-based exchange rate that reflects economic fundamentals.
Ms. Jain-Chandra: To elaborate, our qualitative policy recommendations are similar to those in the External Sector Report for 2025, which assessed the 2024 situation. The key message is that macro policies need to focus on forcefully boosting domestic demand, particularly consumption, and resolving the property sector. Boosting domestic demand will reflate the economy, increase inflation, and lead to an appreciation of the real exchange rate, helping to close internal and external imbalances. We recommend greater flexibility in the nominal exchange rate in both directions.
Question 4: China's industrial policy levels are very high, including as a percentage of GDP, and are much higher than many peer nations. Did you get any indication from Chinese officials that they're willing to consider reducing industrial policy during the next Five-Year Plan, especially given the self-reliance campaign and the focus on science and technology?
Ms. Georgieva: We've conducted an extensive study on the impact of industrial policy in China. Our conclusion is that industrial policies need to be scaled down, as they sometimes correct market failures but result in a loss of 1.2% in productivity due to misallocation of resources. This is a disadvantage for China. We recommend setting a high bar for the application of industrial policy.
Our latest World Economic Outlook includes a chapter on industrial policy, assessing global practices and making the same recommendation: have a high bar for industrial policy application and avoid harming the economy through misallocation of capital and labor.
In our discussions with the Chinese authorities, they understand that industrial policies bear direct fiscal costs and that using this fiscal capacity more effectively could stimulate consumption and resolve the property sector problem. We calculate that resolutely addressing the property sector problem will require China to spend over 5% of GDP over the next three years, which necessitates tighter fiscal space management, including tighter industrial policy application.
Question 5: Speaking of the property sector, how does the IMF view its interaction with consumption in China, and what advice do you have for China regarding this issue?
Ms. Georgieva: We recognize that this is a protracted problem that has significantly impacted consumer confidence in China. The impact is twofold: people feel compelled to save due to the loss of value in their assets, and the unfinished business in the property sector makes it difficult to meet real estate demand in certain areas.
The Chinese authorities have taken measures to address the property sector, and they understand the problem. Our advice is to be more determined and decisive. We suggest two active approaches: letting unviable developers exit to reduce liabilities related to the property sector and being more proactive in completing unfinished housing projects. We believe there's a need for more decisiveness in letting unviable developers exit, and we've been urging more attention to closing this program, which we call
