By David Lawder

China's Industrial Policy and Trade Surpluses

WASHINGTON (Reuters) – China's industrial policy may be influencing certain industries but is not the main factor behind the country's rising exports and external surpluses, according to IMF chief economist Pierre-Olivier Gourinchas.

In an interview at this week's IMF and World Bank annual meetings, Gourinchas countered the U.S.-driven narrative on China's industrial overcapacity, stating that macroeconomic factors, particularly low domestic demand in China and high consumption in the U.S., are the primary reasons for the increasing Chinese trade surpluses.

Gourinchas emphasized that the resurgence in Chinese exports, essential for staving off a slowdown in the country's growth as per new IMF forecasts, is not chiefly due to China's industrial policies. Instead, it is largely a result of macroeconomic forces.

The core issue is China's subdued consumer spending, compounded by a property market crisis negatively impacting household wealth, which has led some production to be redirected toward exports. In contrast, the U.S. is experiencing rising trade deficits due to robust demand from strong household and government spending, leading to higher import demand from China.

Gourinchas noted that the interplay between weak demand in China and strong demand in the U.S. creates significant imbalances.

In a recent blog post, Gourinchas and other senior IMF officials reiterated that while industrial subsidies in China affect specific sectors' trade dynamics, these effects are limited and do not significantly impact overall external balances.

Yellen's Concerns

This perspective contrasts with U.S. Treasury Secretary Janet Yellen's position, who has warned about threats to U.S. manufacturing jobs from Chinese overcapacity, especially in sectors such as electric vehicles, batteries, solar cells, and semiconductors, all of which recently faced substantial U.S. tariff increases.

Yellen remarked at a Council on Foreign Relations event that every Chinese province is vying to invest more in these industries, highlighting the massive level of subsidization and pointing out that many loss-making firms are being maintained, resulting in significant overcapacity.

According to Gourinchas, while there may be some sectoral effects from Chinese subsidies that could distort trade, addressing these issues falls within the realm of the World Trade Organization. He mentioned that the IMF is striving to assess the impact of industrial subsidies in China and other state-dominated economies, though transparency remains challenging.

To alleviate imbalances between the U.S. and China, Gourinchas suggested enhancing domestic demand to absorb production currently allocated to exports. He stated that addressing the property sector issues is essential for bolstering consumer confidence in China.

"We need to encourage Chinese households and firms to spend and invest more and save less," he explained. This entails developing social safety nets for healthcare and aging support.

For the U.S., implementing fiscal tightening could help manage the excessive import demand from China. The Fund has long advocated for Washington to increase taxes to decrease its debt trajectory.