IMF Urges China to Reduce Industrial Subsidies and Rebalance Economy

The International Monetary Fund (IMF) has called on China to significantly reduce state support for its industries, amid growing international concerns about overcapacity and trade imbalances. The IMF’s recommendations, made in December 2025, come as China’s global trade surplus exceeded $1 trillion in the previous year, sparking tensions with Western nations.

Calls for Subsidy Reduction

The IMF estimates that China currently allocates approximately 4% of its Gross Domestic Product (GDP) to subsidizing companies in key sectors. It recommends reducing this by 2 percentage points in the medium term. Financial Times reports that this call comes as international concerns mount about overcapacity in the world’s second-largest economy.

Impact of Industrial Policies

According to Sonali Jain-Chandra, the IMF’s mission chief for China and Asia Pacific, China’s industrial policies, even as enabling technological innovation in some areas, have had an overall negative impact on the economy. She points to “resource misallocation” and “overspending” as key concerns.

Shift Towards Consumption-Led Growth

The IMF is urging China to move towards a more “consumption-led growth” model, reducing its reliance on manufacturing exports. This includes loosening restrictions on internal migrants’ access to social welfare, implementing a more progressive taxation system, and boosting pensions. AP News highlights this shift as crucial for rebalancing the Chinese economy.

Addressing Property Slowdown

The IMF also addressed the ongoing challenges in China’s property sector. While previously calling for 5.5% of GDP over four years to address the slowdown, the IMF now suggests a similar investment of 5% of GDP over three years. This funding would be directed towards completing unfinished housing projects and supporting the exit of unviable developers. IMF officials emphasize that resolving the “hangover from the boom” remains a critical priority.

China’s Response

Chinese authorities have responded to the IMF’s report by stating that their industrial subsidies are not as substantial as estimated. Zhang Zhengxin, the IMF’s executive director for China, asserted that China’s industrial policies are transparent and apply equally to all types of enterprises, including state-owned, private, and foreign-invested entities.

Economic Projections

Despite these challenges, the IMF projects China’s economy to grow by 5.0% in 2025 and 4.5% in 2026. These projections represent an upward revision compared to previous forecasts, driven by macroeconomic policy stimulus measures and lower-than-expected tariffs on China’s exports.

IMF Urges Shift in Fiscal Focus

A senior IMF official has also urged China to shift its fiscal spending away from industrial policy and towards measures that boost domestic consumption. Reuters reported on this recommendation in October 2025.