Can China Continue to Export its Way Out of its Property Slump?

China’s economy has experienced a prolonged bout of deflation (falling prices). Unemployment is likely higher than reported. The banking system has unrealized losses from its lending to property developers, many of which either need to be shut down or to have their debt converted into equity. Some unlucky Chinese households that prepaid for an apartment five years ago are still waiting for the delivery of the delivery of their apartment.

The result, per a recent article in the New York Times, is a broad-based malaise.

"A real estate crisis in China has dragged on for five years with no end in sight, sapping the strength from one of the economy’s pillars. Local governments, strapped for cash because of the property downturn, are not pouring money into infrastructure projects as they did during previous periods of economic malaise. Beijing’s crackdown on excessive competition among Chinese manufacturers has chilled the climate for capital investment to fuel expansion"

If the debts of local investment vehicles (mostly mechanisms for financing infrastructure, but sometimes for financing industrial or other investments) are added to the debt of the central government and the recognized debts of China’s provinces, the IMF estimates that Chinese public sector debt is around 125 percent of GDP, and the on and off balance sheet fiscal deficit may over 12 percent of GDP. 

With a big stock of government debt, the easiest way out of trouble, it would seem, is a weaker currency and a strong boost from exports.

That is in fact how China has been growing since its property bubble burst—or was pricked—in the middle of 2021. Net exports have contributed over a percentage point to annual growth on average—and much more than that in 2024 and the first three quarters of 2025.*

The underlying trade data actually points to a bigger contribution from net exports than in official "contributions" data, and there is skepticism that the reported domestic contributions are as large as reported—which would imply that net exports could have been the main driver of China’s recent growth.  The result is a $1 trillion customs trade surplus after only 11 months of data, and overall goods surplus that should -- if accurately measured -- approach an astonishing $1.2 trillion dollars (6% of China's GDP, well over a percentage point of the GDP of all of China's trading partners).

What's more, the property downturn is not yet over.  A big state backed developer, Vanke, is the latest firm to face financial trouble.  The Times correctly notes: "there has been no industrywide bailout or comprehensive plan to spur real estate investment."   Real estate investment is still sliding, and investment in manufacturing and infrastructure really do seem to have slowed in the last few months (there are huge data issues though).  A simple plot confirms that "Investment in property, infrastructure and manufacturing — the three major components that make up the figure — are all declining at the same time"

The combination of a new domestic downturn and high general government fiscal debt is the basis for calls that China needs additional monetary easing to solve its deflation problem.**

In a classic model, monetary easing works in part through a weaker exchange rate and higher net exports.

Thus, a recommendation that China ease monetary policy to offset deflationary pressures is de facto a recommendation that China try to export its way out of a domestic downturn.  All the more so if the call for monetary easing is combined with a call for fiscal tightening, as the IMF did in 2023 and 2024.**

But relying on monetary easing alone to get an economy as big and as unbalanced as that of China runs into a few problems.

The obvious problem is that China’s trade surplus is already very large.  In fact, its manufacturing surplus is already bigger than that any country has ever run relative to the GDP of its trading partners.

As Greg Ip and others have noted, China's recent economy has been marked by both stunning export success and the absence of any real import growth. Import volumes are essentially unchanged from their 2018 levels. That means that China's export success requires other countries to shift out of their own export sectors -- not shift into new export sectors.  There are thus real concerns that a China that continues to rely on exports to make up for its lack of domestic momentum necessarily implies the deindustrialization of other economies.  Europe, for example, is now worried. Germany included.  The old export based economies now need to shift out of exporting sectors to more domestically facing sectors to make space for China's growing exports, a difficult process.  And much of the emerging world now worries about premature deindustrialization.

Moreover, China’s massive manufacturing sector and large trade surplus have created concerns among China's trade partners about dependence on Chinese industrial inputs and the associated risk of vulnerability to supply chains that China has weaponized in the past and that China could weaponize in the future.  

In other words, policies that work for a small country with a modest surplus -- or a past deficit that needs to swing into a surplus during a period of balance sheet repair -- don't necessarily work for a large economy that already runs a substantial surplus.

China’s external surplus—as reported—is set to top 3 percent of GDP this year.  But there is a reasonable case that this number is understated.  In my view, the actual surplus could be around 5 percent of China’s GDP, and thus close to a percentage point of world GDP.  If China had continued to use the same balance of payments methodology that it used from 2010 to 2021 its surplus would already be well over 4% of its GDP.

That makes it a bit complicated for outside observers to encourage China to continue to export its way out of its downturn. After all, China never ran an external deficit even at the peak of its property boom and thus it never really shared demand with the rest of the world  when times were good.  It consequently feels like a reach to ask the world to share a lot of demand with China now that its domestic engine is still stalled.  

The IMF is thus -- it seems -- starting to reevaluate whether its traditional advice of monetary easing and fiscal tightening still fits the moment. The Fund, after all, should emphasize policies that are good for the entire global economy, not just good for a single member—and it is hard to see what the world gains from a policy path that would result in a weaker Chinese yuan, even more Chinese exports and a customs surplus that keeps on rising.

In fact, the standard policy response in a country with falling domestic prices and rising domestic unemployment and a rising external surplus is a fiscal expansion. 

And such a course still makes sense for China.

For all the talk of China's debt troubles, China’s central government simply isn't that indebted.  It thus has a lot of fiscal space. An impressive 2023 IMF working paper (Lam and Badia)  found that the central government had as many financial assets as financial liabilities.  Yes, the central government has many contingent liabilities -- but it starts with a very clean balance sheet and thus a large margin of fiscal manuever.

The IMF now seems to be pivoting a bit.  The concluding statement of the IMF's mission emphasized the need for both fiscal and monetary expansion.  The Managing Director noted "As the second largest economy in the world, China is simply too big to generate much growth from exports, and continuing to depend on export-led growth risks furthering global trade tensions." This new tone is a welcome.

There is still a temptation, I suspect, to think that China can kill two birds with one stone.  After all if China spends large sums subsidizing industry (a recent estimate put the subsidy bill at 4 percent of China's GDP). cutting industrial subsidies would perhaps allow China to combine fiscal tightening with external adjustment.

But caution is warranted.  Cuts to inefficient investment are still cuts to investment, and thus in the first instance, paring back subsidies for new manufacturing capacity reduces domestic demand. And reduced investment (or a smaller fiscal deficit) would normally be expected to add to the savings and investment imbalance, and result in a higher external surplus (the same logic applies here as the logic that led the IMF to argue that a reduction in property investment should result in a bigger external surplus; see Box 1.1 in the 2024 External Sector Report).

Generating true adjustment requires policies that raise consumption and domestic demand, not just policies that reduce investment. It thus takes policies that use the central government's fiscal space to directly support consumption, now just curbs on local government industrial subsidies (Keith Bradsher of the New York Times has reported that local governments sometimes have built entire factories to the specification of a coveted EV firm) and limits on the activities of government investment funds.  

For those who prefer not to think in terms of the savings and investment balance, consider the impact of reduced investment in manufacturing on a specific sector such as steel.

The property downturn reduced internal Chinese demand for steel and that has already led to a surge in Chinese steel exports over the past few years.  But the biggest offset to reduced demand for steel in property development was a large increase in the demand for steel from the manufacturing sector: new factories, equipping those factories with robot arms, and creating an outlet for all the cars that China can now produce (see this paper from Australia's central bank). If manufacturing investment falls, China’s future steel capacity may not expand as fast, but China’s existing steel capacity will find fewer domestic buyers. That means either yet more exports (forcing plant closures globally) or shutting down domestic steel plants (more domestic deflationary pressure on wages).

The simple reality is that there are no easy solutions to bringing down China’s surplus other than, well, allowing a much stronger yuan—and then counting on the pressure from a stronger yuan and limited export growth to compel China to undertake the structural and fiscal policies needed to bring its savings rate down and fire up a domestic consumption engine. 

The IMF is at least now expressing concern about China's weak real exchange rate, rising external surplus and dependence on net exports for growth.

But it isn't enough to the IMF to make a needed course correction in its policy advice.  China itself doesn’t seem to have any urgency in making the needed changes in policy direction. President Xi still prefers supporting investment in a factory to supporting household spending.  And the absence of support for household spending is a bit of a problem in a country that has is both extremely large and spectacularly reliant on net exports for growth.

* Monetary easing has in fact been a central recommendation of the IMF for the last few years:

“[The IMF Board] encouraged additional monetary easing via interest rates to boost domestic demand and further mitigate deflation risks”; The IMF’s overall recommendation in 2024 was fiscal tightening (apart from the housing bailout) and monetary easing “ [Apart] from such support [for the completion of unfinished homes], a neutral structural fiscal stance in 2024 and a gradual decline in the structural deficit in 2025 would balance the tradeoffs between supporting domestic demand, reducing deflation risks, and containing government debt which remains elevated. Additional monetary easing via interest rates would support domestic demand, while allowing for greater exchange rate flexibility would help absorb external shocks and reduce disinflationary pressures and deflation risks.”

** The absence of a quarterly data series with real exports and imports as a level makes confirmation hard; the raw goods export volume data, if anything, supports a bigger net exports contribution since the start of the pandemic and in the last few quarters.