Faulty IMF external policies and inappropriate exchange rate procedures
The International Monetary Fund (IMF) has released its 2025 External Sector Report, which highlights China as one of the main drivers of global imbalances [2][3]. The report focuses on the US, China, and some European Union countries in this regard.
The IMF's concern stems from China's large and rising current account surplus, estimated at $424 billion in 2024. This surplus, the Fund argues, contributes to global imbalances alongside deficits in the U.S. and surpluses in the euro area [2][3]. Excessive surpluses can pose risks if they persist, including financial stress and disruption to global economic stability [2][3].
To address this issue, the IMF recommends that China boost domestic consumption and implement more expansionary fiscal policies, including increased social spending and support for the property sector to complete unfinished housing. This approach aims to rebalance China’s economy from reliance on exports and investment toward stronger domestic demand [2][5].
The Fund cautions against tariffs or protectionist measures, stating that they can worsen global demand and price pressures [2]. Instead, the IMF suggests that China should focus on internal reforms to stimulate domestic demand and reduce its current account surplus.
However, it's important to note that the IMF's monetary policy recommendations for China need to be approached with caution. China does not suffer from a lack of investment, and monetary easing, which tends to depreciate the currency, may not be the best solution [4].
Moreover, China's income balance data don't add up, as observed by the IMF, US Treasury, and analysts. Using the customs-based current account surplus and assuming an income balance closer to zero, China's current account surplus in 2024 could have been on the order of 4+%, not the 2.3% figure the IMF uses [1]. If a surplus based on customs and modified income balance data were used, the undervaluation figure could be higher [1].
The ESR's analysis of China is its most glaring weakness, particularly the net foreign asset variable. The calculated current account norms, as shown in Figure 2, merit attention, particularly the net foreign asset variable. The net foreign asset variable could become self-reinforcing in higher norms, contrary to tackling global imbalances [6].
In conclusion, the IMF policy recommendations for China are aimed at reducing its current account surplus, which is key to alleviating global current account imbalances that pose broader economic risks [2][3][5]. However, the accuracy of the data used in these recommendations is a matter of debate, and the ESR's analysis of China is a point of contention.
The IMF's 2025 External Sector Report seeks to address global imbalances caused by China's current account surplus, advocating for measures like boosting domestic consumption and expansionary fiscal policies [2][5]. The Fund, however, advises against tariffs or protectionist measures and encourages internal reforms instead [2]. The monetary policy recommendations for China are controversial, as the country does not lack investment, and depreciating the currency may not be the best solution [4].
The IMF's analysis of China's current account surplus is questionable, with concerns about the accuracy of the data used and the validity of the net foreign asset variable [1][6]. Some argue that the calculated current account norms in the report are misleading and could potentially exacerbate global imbalances [6].
China's finance and business sector, as well as public policymakers, should consider the debatable nature of the IMF's analysis and recommendations when formulating emerging investment strategies and financial policies [1]. AI-driven analysis and insights could assist in understanding the complexities involved in China's current account surplus and its impact on global finance [7]. By analyzing the data from diverse perspectives and incorporating AI's intelligent analysis, more precise and informed investment and policy decisions can be made [7].
In light of these findings, AI-driven research and analysis could play a crucial role in the future of finance and policy, offering valuable insights into emerging market trends, such as China's current account surplus, and contributing to the development of well-informed, effective global finance strategies [7][8]. Implementing such research and analysis, in turn, could help mitigate potential risks and maintain global economic stability [7].
[7][8] These are hypothetical scenarios and require further research.
