China’s Economy Faces Pressure: Weak Domestic Demand Meets Persistent Trade Surplus

Domestic demand stutters while exports keep flowing—China's economic engine is running on one cylinder.

The Internal Squeeze

Consumers are holding tight to their digital yuan wallets. The spark just isn't there. Factory gates might be busy, but the shopping malls and service sectors tell a quieter story. It's the classic mismatch: production without proportional local consumption creates a fragile foundation.

The External Lifeline (and Its Limits)

That trade surplus keeps the lights on, a massive inflow of foreign capital propping up the balance sheet. But relying on external markets is a hedge fund manager's dream—high reward, terrifying risk. Global sentiment shifts, and that lifeline could snap. It's growth, but the kind that has traditional economists reaching for the antacid.

The Crypto Angle: A Silent Pressure Valve?

Watch the on-chain flows. Persistent economic pressure doesn't just affect stocks and bonds; it fuels the search for alternative stores of value and capital mobility. Digital assets don't care about trade balances—they operate on a different set of rules entirely. When traditional levers feel weak, decentralized networks often see a surge in attention. Just ask anyone who's ever tried to move capital the old-fashioned way during a currency crunch.

A trade surplus built on shaky domestic demand is like a blockchain with great throughput but no decentralization—it works until it doesn't, and the failure isn't graceful. The pressure is on. The real question is which system adapts first.

Weak demand drags while exports swell

At the end of the mission, Sonali laid out the risks in blunt terms. She said, “China’s economy has shown notable resilience despite facing multiple shocks in recent years.” Then she added the pressure points.

Property is still in a long reset. Local governments took hits to their balance sheets. Consumers stayed cautious. The result showed up in weak domestic demand and deflation stress.

Low inflation against trading partners pushed the real exchange rate lower. That lifted exports. It also stretched external gaps wider. The IMF now sees the current account surplus hitting 3.3% of GDP in 2025. Sonali warned that China’s size and rising trade tension make export dependence risky. “Reliance on exports is less viable for sustaining robust growth,” she said.

She also listed deeper limits on growth. Productivity gains are slowing. The population is aging. Debt levels are high. Returns on new investment are falling. These forces pull down the medium‑term track even if near‑term growth holds steady.

Officials told the IMF they aim to lift consumption. They already rolled out expansionary fiscal plans and policy easing. They added targeted steps for households and for property. They also moved against “involution,” the intense price cutting that hurts profits in some sectors. The retirement age was raised to support the labor supply. Local government debt swaps are now under way to ease funding stress.

IMF pushes for forceful shift toward consumers

The IMF said the Core goal for China must now shift to consumer‑led growth. Sonali said a stronger and faster policy mix is needed.

“The key policy priority is to transition to a consumption‑led growth model, away from an overreliance on exports and investment,” she said. The Fund wants this done without shaking financial stability or adding new debt risks.

The first step targets macro imbalances. The IMF called for larger fiscal stimulus backed by easier money and more flexible exchange rates. The goal is to lift demand at home and lift prices off the floor.

The Fund also wants stronger social protection to cut the need for precaution savings. Property support must continue while excess industrial support and wasteful projects get cut. The IMF said this mix WOULD also lift the real exchange rate and narrow trade gaps.

The second track focuses on debt. The Fund wants fiscal and financial rule changes and full balance‑sheet cleanup. Local financing vehicles that cannot survive should go through formal insolvency paths.

This must come with a plan to limit spillovers across banks and public finances. The IMF added that government debt will need steady fiscal tightening once deflation pressure fades.

The third track is about growth capacity. The IMF flagged barriers inside China’s own market. These include limits on services, uneven rules for firms, and labor gaps. Priorities include opening services, equal treatment across companies, fixing skill gaps, and dealing with youth joblessness.

The IMF said that progress on these three fronts could add about 2.5 percentage points to GDP by 2030 and cut external gaps.

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