China’s New Chapter: Rebalancing and Unleashing Market Forces

IMF News, March 22, 2026

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Remarks delivered by Dan Katz, First Deputy Managing Director, at the China Development Forum on March 22, 2026.
Global environment characterized by rapid change across trade, geopolitics, technology, and demographics, with an increase in the frequency of shocks.
Recent conflict in the Middle East introduced a significant new source of risk to the global economy, complicating policy trade-offs.
Policy responses discussed:
- Fiscal policy may need to cushion households via energy caps and subsidy schemes, which are fiscally costly and can suppress price signals.
- Central banks face a trade-off between guarding price stability and avoiding tighter financial conditions; high option value to waiting for now for some central banks.
- Recommendation: central banks should articulate potential reaction functions, including scenario analysis, to sensitize markets to possible policy paths.

Over the past 40 years, China achieved rapid growth and became the world’s second largest economy.
By lifting over 800 million people out of extreme poverty, China dramatically expanded its middle class.
Policy mix combined market-oriented reforms and state direction, with a general trend toward a greater role for the private sector.
Historical shift in industrial revenues: from 1999 to 2015, the share of total industrial revenues of state-holding enterprises went from approximately 50 percent to approximately 20 percent.
Recent years have seen a stall in the increased role of the private sector, coinciding with slowing overall growth, less efficient resource allocation, declining returns on investment, and demographic pressures.

Weak domestic demand, especially consumption, risking deflationary pressures that could become entrenched.
Over-investment in some industries (involution) and a property sector overhang that weighs on household and business confidence.
Direction of capital toward less-productive borrowers has led to rising debt and weakened financial institutions.
The Chinese service sector is significantly smaller than in other major economies despite China accounting for approximately 30 percent of global manufacturing output.

Authorities adopted a more expansionary fiscal policy stance in 2025 and 2026 and initiated an anti-involution campaign to reduce over-investment.
The 15th Five-Year Plan prioritizes increasing consumption to drive growth and reduce external imbalances.
Policy directions recommended to boost consumption and domestic demand:
- Boost household incomes and reduce incentives for precautionary savings.
- Shift resources away from industrial subsidies and infrastructure toward social safety net programs and stabilizing the property sector.
- Shift tax incidence from middle-income households toward higher-income households and reduce corporate tax exemptions.

1. Level the playing field across firms

Reduce reliance on subsidies, tax breaks, and cheap credit targeted at specific firms and sectors.
IMF estimates: scaling back preferential treatment provided to specific firms and sectors could boost aggregate productivity by over 1 percent, raising China’s level of GDP by up to 2 percent.
Allow private firms, small and medium enterprises, and foreign companies to compete fairly to spur innovation and productivity.
The government’s Private Economy Promotion Law noted as a useful start.

2. Greater reliance on market-based pricing

Cost of capital is crucial; market-based pricing would direct funding to more productive enterprises.
Remove incentives for overproduction, for example by doing away with targets for GDP growth and production in specific sectors.
In the property sector, accelerate the exit of unviable developers and allow greater housing price flexibility to clear the overhang.

3. Strengthen the services sector

China’s service sector has substantial room to grow; total factor productivity in market services is already growing faster than in manufacturing.
With less regulation and a larger market role, services such as healthcare, education, and professional and technical services could expand and durably raise productivity.

Market forces should play a larger role in directing resources to their most productive uses.
The state’s role should evolve from directing investment in specific industries toward building conditions that enable private sector innovation.
Deeper market-oriented reforms could unlock new engines of growth, increase resilience to shocks, and be beneficial for China and the global economy.

Key quotations and guidance:
- “Doing nothing is perfectly logical if it is the best available alternative” — applied to central banks’ option value of waiting.
- “Market forces are the key to unlocking the next phase of China’s economic growth.”

Source: Remarks by IMF First Deputy Managing Director Dan Katz at the China Development Forum, March 22, 2026.