I.M.F. Is Upbeat on China’s Growth But Questions Industrial Policy

Responding to China’s surging exports and extensive investments in new factories, the International Monetary Fund made sizable increases on Wednesday in how much it believes China’s economy will grow this year and next.

The I.M.F. now estimates that China will grow 5 percent this year and 4.5 percent in 2025. That is 0.4 percentage points more for each year compared with the fund’s predictions just six weeks ago.

China’s gross domestic output expanded 5.2 percent last year as the economy rebounded following nearly three years of stringent pandemic policies that included numerous municipal lockdowns and mandatory quarantines. Many economists, including at the I.M.F., had anticipated that growth would falter this year because of a severe contraction of China’s housing market and a slowdown in domestic spending.

Yet while property prices continued to fall and retail sales grew sluggishly, China’s economy powered ahead instead in the first three months of this year, expanding at an annual rate of about 6.6 percent because of booming exports and strong factory investments.

The Chinese government is taking steps to address the housing crash, but it faces enormous challenges. Years of overbuilding have resulted in four million new but unsold apartments and, by one conservative estimate, as many as 10 million that developers have sold but not finished building.

Many owners of vacant apartments now find themselves facing years of hefty mortgage payments but little chance the apartments will appreciate significantly in value.

A plan unveiled this month for local governments to buy large numbers of empty apartments and convert them to affordable housing has been met 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 and solar panels.

Janet L. Yellen, the United States Treasury secretary, has outspokenly criticized China in recent months for its industrial strategy. She has warned against allowing China to greatly increase its exports to make up for its economic troubles at home. She has begun rallying international support for tariffs or other restrictions on low-cost Chinese exports that may threaten industries and jobs in the West. President Biden this month announced sharp increases in tariffs on a range of Chinese imports, including electric vehicles and solar panels.

Xi Jinping, China’s top leader, said that China’s policies were helping the world by increasing the global supply of goods and alleviating international inflation pressures.

Ms. Yellen criticized the I.M.F. last month for not challenging China’s manufacturing push, which she described as creating unneeded overcapacity that is leading Chinese companies to ship their products overseas at very low prices.

Chinese officials reject the term overcapacity as an unfair characterization of their economy, and the I.M.F. statement on Wednesday avoided the word. The fund also avoided any mention of China’s trade surplus, which for manufactured goods now equals a tenth of the entire economy’s output.

But the statement did call for China to begin pulling back on policies that help its manufacturers.

“China’s use of industrial policies to support priority sectors can lead to a misallocation of domestic resources and potentially affect trading partners,” the I.M.F. said.

The fund also said that China should take comprehensive measures to address its housing market troubles and stem weakness in domestic spending. The I.M.F. recommended a longer-term effort to strengthen the social safety net and the services sector.

Mr. Xi has been wary of increases in social spending. “We still must not aim too high or go overboard with social security, and steer clear of the idleness-breeding trap of welfarism,” he said in a speech three years ago.

With China’s labor force gradually shrinking because of a decades-long “one child” policy, and with productivity gains slowing now that China has caught up or passed the West in many technologies, the economy is still expected to grow more slowly in the coming years. The I.M.F. staff predicted in the statement on Wednesday that growth would slow to 3.3 percent by 2029.