IMF optimistic about Chinese growth but questions industrial policy

In response to China’s booming exports and massive investment in new factories, the International Monetary Fund on Wednesday significantly increased its estimate of how China’s economy will grow this year and next.

The IMF now estimates that China will grow 5% this year and 4.5% in 2025. That’s 0.4 percentage points more for each year than the fund forecast just six weeks ago .

China’s gross domestic product grew 5.2% last year as the economy rebounded after nearly three years of strict pandemic policies that included numerous municipal lockdowns and mandatory quarantines. Many economists, including at the IMF, had predicted that growth would weaken this year due to a severe contraction in China’s real estate market and a slowdown in domestic spending.

Yet while property prices continued to fall and retail sales grew slowly, China’s economy grew instead in the first three months of this year, with annual growth of around 6. 6 percent thanks to booming exports and strong investment in factories.

The Chinese government is taking steps to address the real estate crisis, but it faces enormous challenges. Years of overbuilding resulted in the creation of four million new but unsold apartments and, by one conservative estimate, as many as 10 million developers sold but did not complete construction.

Many owners of vacant apartments now find themselves facing years of high mortgage payments, but the value of their apartments is unlikely to appreciate significantly.

A plan unveiled this month for local governments to buy large numbers of empty apartments and convert them into affordable housing was greeted with skepticism by many analysts.

Beyond housing, China has made very heavy investments this year in its factories, which already dominate global markets for goods ranging from furniture to electric vehicles to solar panels.

Janet L. Yellen, the United States Treasury Secretary, has openly criticized China in recent months for its industrial strategy. She warned against allowing China to dramatically increase its exports to compensate for its domestic economic woes. She has begun to rally international support for tariffs or other restrictions on low-cost Chinese exports that could threaten industries and jobs in the West. President Biden this month announced steep tariff increases on a series of Chinese imports, including electric vehicles and solar panels.

Xi Jinping, China’s top leader, said Chinese policies helped the world by increasing the global supply of goods and easing international inflationary pressures.

Ms. Yellen last month criticized the IMF for failing to challenge China’s manufacturing push, which she described as creating unnecessary overcapacity that leads Chinese companies to ship their products abroad at rock-bottom prices.

Chinese officials reject the term overcapacity as an unfair characterization of their economy, and the IMF statement released Wednesday avoided the word. The fund also avoided mentioning China’s trade surplus, which for manufactured goods is now equivalent to a tenth of the entire economy’s output.

But the statement calls on China to start abandoning policies that help its manufacturers.

“China’s reliance on industrial policies to support priority sectors may lead to misallocation of domestic resources and potentially affect its trading partners,” the IMF said.

The fund also said China should take comprehensive measures to resolve problems in the real estate market and stem weak domestic spending. The IMF recommended a longer-term effort to strengthen the social safety net and the services sector.

Mr. Xi is wary of increasing social spending. “We must always neither aim too high nor go too far in social security, and avoid the idleness trap of welfarism,” he said in a speech three years ago.

As China’s workforce gradually shrinks due to a decades-long “one-child” policy, and productivity gains slow now that China has caught up with or overtaken the West in many technologies, the economy is expected to grow even more slowly in the years to come. years. IMF staff predicted in a statement on Wednesday that growth would slow to 3.3% by 2029.