4. IMF Analysis: China’s Economic Imbalances and Global Spillovers

The International Monetary Fund (IMF), in its February 2026 Article IV Consultation report, has cautioned that China’s current economic model is increasingly unsustainable. The Fund highlights a critical disconnect where over-reliance on exports and state-led investment is creating domestic inefficiencies and distorting global trade. Key Summary of IMF Findings • Shift to Consumption: The IMF identified transitioning to a consumption-led growth model as China\'s \'overarching priority.\' The current model, reliant on heavy investment and exports, is leading to \'waste at home and damage abroad.\' • External Imbalances: China’s current account surplus (estimated at 3.3% of GDP in 2025) has triggered \'adverse spillovers\' for trading partners. This is exacerbated by a real depreciation of the Renminbi (undervalued by approximately 16%), which makes Chinese exports hyper-competitive at the cost of global producers. • Deflationary Pressures: Weak domestic demand— fueled by a protracted property sector slump and an inadequate social safety net—has kept inflation near 0%. The IMF warned that persistent deflation risks a \'downward spiral\' in consumer confidence. • Fiscal Reorientation: The report urges Beijing to pivot fiscal spending away from industrial subsidies and infrastructure toward social protection (healthcare, pensions, and unemployment benefits) to reduce \'precautionary savings\' by households. • Structural Reforms: Recommendations include reforming the Hukou (household registration) system to grant urban status to 200 million rural migrants, which alone could boost the consumption-to-GDP ratio significantly. • Growth Outlook: While the economy grew by 5% in 2025, the IMF projects a slowdown to 4.5% in 2026, citing demographic shifts (aging labor force) and diminishing returns on investment. Key Definitions • Article IV Consultation: An annual review by the IMF where staff visit a member country to assess economic and financial policies. • Current Account Surplus: A situation where the value of a country\'s exports of goods and services is greater than the value of its imports.• Involution (Neijuan): A term used in the report to describe \'excessive price competition\' in China where entities over-invest and compete intensely without achieving significant technological or economic progress. • Hukou System: A Chinese legal document that records a household\'s residency, often restricting rural migrants\' access to urban social services. Constitutional & Legal Context • IMF Articles of Agreement (Article IV): Under this article, member countries agree to collaborate with the Fund to ensure exchange rate stability and avoid \'competitive exchange depreciation.\' • 15th Five-Year Plan (2026-2030): China\'s primary economic roadmap, which the IMF suggests must align with these structural rebalancing goals. • Special Drawing Rights (SDR): Since 2016, the Renminbi has been part of the IMF’s SDR basket, implying a commitment to transparency and market-oriented exchange rates. Global and Indian Implications • Trade Protectionism: China\'s \'export-first\' strategy often leads to anti-dumping duties and tariffs by partners like the EU and USA to protect domestic manufacturing. • Impact on India: As India seeks to expand its manufacturing base via PLI Schemes, \'dumping\' of low-cost Chinese goods (especially in steel and chemicals) remains a major challenge. However, a rebalanced Chinese economy could open a massive market for Indian agricultural and service exports. Conclusion The IMF’s assessment underscores that China’s \'growth-at-all-costs\' era, powered by debt and exports, is hitting a wall. For the global economy to remain healthy, the world\'s second-largest economy must empower its own consumers rather than just its factories. Beijing\'s \'brave choice\' to reform social safety nets will determine whether it can avoid a \'lost decade\' similar to Japan\'s 1990s experience. UPSC Relevance • GS Paper II: International relations; Effect of policies of developed/developing countries on India\'s interests; Important International institutions (IMF). • GS Paper III: Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment; Global Trade and Supply Chains. • Prelims Focus: Article IV Consultations, SDR basket components, Current Account Deficit vs. Surplus, and the impact of Renminbi valuation on the Rupee.