IMF Releases Report; Zhongnanhai Elites Feel a Chill

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[People News] As Beijing is about to enter the annual “Two Sessions” period, a report released by the International Monetary Fund (IMF) on the eve of the meetings has poured cold water on the political spectacle, leaving top leaders in Zhongnanhai feeling chilled. What hidden economic concerns does this report reveal? Let’s take a look at this warning issued just before the Two Sessions.

A Cold Shower Before the Two Sessions: The IMF Report

First, let’s examine a paradoxical phenomenon: “Growth remains, but prices are disappearing.”

Although China reportedly achieved 5% growth in 2025, overall inflation for the same year was 0%. What does that mean? It means that even if output on paper has increased, nominal growth may be only around 3%. Companies are not making money, government tax revenues are slowing, yet debt burdens are being magnified in a low-price environment.

On February 26, Liberty Times Net cited a Wall Street Journal report stating that the word “deflation” appeared more than 60 times in the IMF report. For an international organization known for cautious wording, this is almost an open warning: China’s economic engine is facing the risk of stalling.

What is deflation? Imagine walking into a store and finding prices getting cheaper and cheaper. It may seem like good news, but it isn’t. As prices fall, corporate profits shrink or even turn into losses. Over time, companies that can’t make money may lay off workers, leading to declining household incomes and even weaker consumption. This economic warning sign is called deflation. The alarming fact is that China has experienced deflation for three consecutive years.

Next, let’s talk about the “elephants in the room.”

The first elephant is debt. The IMF estimates that the Chinese government’s debt-to-GDP ratio will exceed 135% in 2026. Even more alarming are local government financing vehicles, which amount to tens of trillions of dollars in scale, with about one-third technically insolvent and surviving only by “borrowing new to repay old.”

The second elephant is real estate, which people feel most directly. China’s property market has been in decline for five consecutive years, with new housing starts shrinking by 75% from their peak. IMF experts describe unfinished “guaranteed delivery” housing projects and collapsing confidence as structural bombs that no one is willing to truly dismantle.

Some may say, “But China’s exports are strong!” Yes—and that’s precisely the problem. China is falling into a K-shaped economy: strong exports, but extremely weak domestic demand.

In 2025, China’s trade surplus reached as high as $1.2 trillion. Because domestic goods are not selling, excess capacity is being dumped overseas. This “vicious cycle of overcapacity” is damaging local industries in other countries. IMF officials bluntly stated that China’s economic scale is so large that the world can no longer absorb its surplus output.

Domestically, what we see is intense “involution.” From electric vehicles to robotics, destructive price competition is eroding corporate profits. The IMF warns that unless Beijing stops relying on manufacturing subsidies and shifts toward building a strong social security system that gives citizens confidence to spend, China will never escape this vicious cycle.

On February 27, the CCP Politburo convened a meeting, with Xi Jinping seated at the center and the six Standing Committee members sitting beside him. The meeting stated that during the upcoming five-year “15th Five-Year Plan” period, the overall tone would remain “seeking progress while maintaining stability” and “persisting in taking economic development as the central task.” The IMF directly criticized that slogans alone are not enough.

During the Two Sessions in March, the outside world may once again see polished figures and proclamations of institutional confidence. The IMF points out that the “quality” of growth is far more important than the “speed” of growth. If the property market remains unstable, local debt unresolved, and social security inadequate, people will still not dare to spend.

This cold shower may be the sobering dose that the leadership meeting in Beijing most needs right now.

(First published by People News)
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