Weak Domestic Demand but Rising Production and Exports
Maintaining a Weak Renminbi Hurts Trading Partners
The International Monetary Fund (IMF) has pointed out that China’s economic policies are causing damage not only within China but also abroad. It analyzed that policies prioritizing production and exports over domestic demand have led to large trade surpluses and overcapacity, placing a burden on China’s trading partners.
According to Bloomberg on the 18th (local time), the IMF stated in its annual consultation report on the Chinese economy that "China’s top priority is to shift to a consumption-led growth model."
In the report, the IMF criticized China’s large current account surplus for having negative spillover effects on other trading partners. It added, "Part of the surplus stems from the real undervaluation of the renminbi." This means that the real exchange rate of the renminbi has fallen significantly compared with China’s trading partners, thereby securing price competitiveness. This lends weight to criticism that China may be deliberately keeping the value of the renminbi weak in order to offset trade-related uncertainties.
Last month, the U.S. investment bank Goldman Sachs also urged normalization of the exchange rate, saying that the renminbi was about 25% below its fair value. In this report, the IMF likewise noted that the renminbi is undervalued by about 16%.
In this report, the IMF used the term "external imbalances" more than 10 times. Bloomberg reported that "this expression had not been mentioned at all in the 2024 edition of the report." While weak domestic demand has continued to depress imports, exports alone have increased, supported by the weaker renminbi. Bloomberg estimated that China’s exports exceeded its imports by a record-high 1.2 trillion dollars (1,741 trillion won), and that as a result last year’s current account surplus likely reached 3.7% of China’s gross domestic product (GDP). The IMF projected that, in the medium term, the size of the surplus will shrink to 2.2% of GDP by 2030. This would still be well above the normal level of 0.9%.
The IMF also voiced concern about the continued decline in prices. Bloomberg reported that "the IMF report cited falling prices as a key risk factor, with the term 'deflation' appearing more than 60 times." The IMF assessed that deflationary pressures are closely linked to the prolonged slump in the real estate market and weakening demand. It further added that the massive debts of local governments are constraining their capacity to stimulate the economy through fiscal spending.
The pace of government debt accumulation was also cited as a risk factor. The IMF estimated that China’s government debt will reach about 127% of GDP in 2025, roughly 10 percentage points higher than in 2024. The debt ratio is projected to exceed 135% this year and continue to rise through 2034.
The Chinese side did not agree with this assessment. Zhang Zhengxin, China’s representative on the IMF Executive Board, countered in a separate statement, saying, "China’s current account surplus has been driven by competitiveness and innovation capacity," and adding, "There has also been a front-loaded increase in demand caused by U.S. trade policy."
© The Asia Business Daily(www.asiae.co.kr). All rights reserved.
