International Monetary Fund Managing Director Kristalina Georgieva has issued a stark warning to Chinese leadership during her Beijing visit, drawing direct parallels between China’s current economic challenges and Japan’s prolonged period of economic stagnation. Georgieva emphasized the urgent need for President Xi Jinping’s administration to make “brave choices” in accelerating structural reforms to transition China toward a consumption-driven economic model.
The IMF chief highlighted two critical challenges: addressing the ongoing property crisis that fuels deflationary pressures and eliminating so-called “zombie firms” – unviable property developers that continue to operate through bank loan rollovers. “China is simply too big to generate much more growth from exports, and continuing to depend on export-led growth risks furthering global trade tensions,” Georgieva stated regarding the world’s second-largest economy.
While acknowledging differences between China’s situation and Japan’s decades-long deflation battle, Georgieva noted concerning similarities in the accumulation of bad loans and policy responses. China’s deflationary period is now entering its fourth year, with November credit expansion remaining subdued at just 392 billion yuan ($55.7 billion), well below expectations.
The core problem lies in China’s household behavior, where approximately 70% of household wealth is tied to real estate. With property values declining and household loans contracting for two consecutive months – the first such occurrence since records began in 2005 – consumers are hesitant to spend their $22 trillion in savings.
Economists from the Federal Reserve Bank of Dallas have identified mounting evidence of “zombie lending” in China, where banks continue extending credit to unprofitable firms rather than recognizing losses. This practice mirrors Japan’s experience in the 1980s and 1990s, which led to inefficient capital allocation and decreased productivity.
The solution, according to IMF China economist Sonali Jain-Chandra, requires rebalancing demand toward consumption and further opening the service sector, which represents an “underexploited driver of growth.” However, as Rhodium Group economist Camille Boullenois notes, Beijing’s main policy tools – directed use of the financial system and large-scale fiscal support – are becoming less effective and “close to exhausted.”
Without comprehensive structural reforms that alter incentives, increase competitiveness, and level playing fields, monetary easing alone cannot reverse China’s deflationary trajectory or address the growing zombie firm problem as 2025 concludes.