Very interesting perspective. Thank you for sharing it. This passage was striking:
"The efficiency of infrastructure investment should therefore be evaluated not only in terms of short-term economic returns, but also in light of its long-term social returns and broader social significance."
Evaluated through that broader lens, a lot of investments that appear uneconomic may, in fact, be quite positive and sensible.
Much of the concern among economists abroad and within China, is not altruistically motivated. If it were, this interest in China rebalancing her economy in favour of consumption would be touching. Instead it (this concern) is inspired by an attempt to refocus China’s attention from production for exporting to production for domestic consumption — thereby resuscitating the prospect of manufacturing in America, Europe, Japan and others, who simply can’t compete as they once did. Hopefully, their yearning for the captive markets of imperialist times is destined to go unsatisfied.
I take your point. I was trying to illustrate the pro-Western politics that underlie supposedly ‘well meaning’ prescriptions for how China should grow her economy. It’s Pettis I had in mind. But, that said, I’ve noticed, too, how many Chinese economists who are into this ‘consumption led’ new orthodoxy just happen to have been educated in the United States. Not everyone, obviously, but many. Try it for yourself.
Yu’s analysis is actually orthodox economics of long term growth. Whereas Pettis (apparently a professor of finance, not economics) is in the fringe. At least that’s my reading of economics.
Yu notices that “There is, of course, also a wealth effect: a decline in house prices reduces the consumption demand of homeowners, especially property investors.” But his options for government policy are selective and incomplete. He argues that the government has plenty of borrowing power but doesn’t consider a big bang property sector bailout. His insider status suggests such a proposal is politically unacceptable.
Instead, Yu is enthusiastic about opportunities to grow infrastructure investment. Infrastructure is unlike other businesses. It’s either an existing, regulated business or a greenfield investment but in neither case are prices exposing opportunities for more “roundabout production,” which Yu believes, following the Austrians, motivate entrepreneurs. For that reason infrastructure investment is more likely to be unable to pay for itself. His cites Japan as evidence of the unsoundness of traditional fiscal indicators but not as a cautionary tale about relying on infrastructure investment to end debt deflation.
Bottom line: Net exports were the difference between China in the five years following its property collapse and Japan halfway through its first lost decade. For the political economy reasons Yu identifies, it will be hard for them to prevent a Japan-like next five years.
He evades a basic problem of every capitalist economy, including China: investment is for profit. He observes that infrastructure investment is for social benefit regardless of whether a particular project is profitable. In the large, however, these investments must be financed out of surplus value. The problem of Chinese capital is that it cannot find enough profitable investments to keep capital accumulation going. The classic monopoly capitalist escape from this dilemma is export of capital and conquering markets in other countries.
A very useful piece, especially in forcing precision on what we mean by “consumption-driven growth.” But two elements seem missing, and they matter for the policy conclusions.
First, the analysis is effectively conducted in a closed-economy framework. Net exports are virtually absent, which implicitly assumes China can resolve its demand shortfall internally. In practice, when domestic demand is weak and investment efficiency is declining, the external balance becomes a key adjustment margin. Ignoring it sidesteps the question of whether part of the adjustment is being externalized through larger surpluses—precisely where international tensions arise.
Second, Yu treats overcapacity largely as a sectoral phenomenon that will self-correct through standard market mechanisms. This abstracts from the broader role of industrial policy in China. In practice, credit allocation, fx policy, subsidies, and policy support to capital-intensive sectors do not just shape supply at the sector level but also systematically affect income distribution. By channeling resources toward corporates and local governments, these policies tend to suppress the household share of income and reinforce high savings.
Once these two elements are brought back in, the case for resolving current imbalances primarily through investment expansion looks less straightforward, and the trade-offs become more explicit.
Yu Yongding's analysis offers a compelling corrective to the consumption-boosting prescriptions that have dominated recent discourse on China's economy. Western economists advocating a shift toward domestic consumption in China are not acting without motive: a China that consumes more imports less competitively, reduces its trade surplus, and opens its vast market to foreign goods and services in ways that benefit Western exporters and multinationals. The advice, however well-packaged in the language of rebalancing and long-run welfare, conveniently aligns with the commercial and geopolitical interests of the economies offering it. Yu Yongding exposes the theoretical confusion underlying this advice by drawing a sharp distinction between growth theory and macroeconomics: in the long run, growth is driven by capital accumulation, labor, and technological progress, not by consumption, which enters no standard production function as an independent variable. To conflate the demand-side short-run role of consumption with a structural growth engine is precisely the logical error he identifies as endemic to the current debate.
Yu Yongding's investment-led framework is not merely theoretically coherent; it is specifically calibrated to China's present circumstances in ways that Western consumption-led models manifestly are not. The Western path of consumption-driven growth, sustained over decades by financial liberalization, cheap credit, and the hollowing out of industrial capacity, has produced structural consequences that are difficult to ignore: chronic current account deficits, deindustrialization, an expanding rentier class, sovereign and household debt at historically elevated levels, and an atrophying of the planning and coordination capacity needed to build the physical foundations of a modern economy. China, by contrast, retains exactly the fiscal instruments, productive capacity in steel and cement, and institutional coherence to direct investment toward infrastructure that is, as Yu Yongding carefully documents, far from saturated. The fiscal space exists, ten-year yields confirm market confidence, and the project pipeline is real. To abandon investment-led growth at this juncture in favor of a consumption model whose Western exemplars are themselves struggling with productive decline and mounting debt would be to trade demonstrated strength for an imported vulnerability.
Very interesting perspective. Thank you for sharing it. This passage was striking:
"The efficiency of infrastructure investment should therefore be evaluated not only in terms of short-term economic returns, but also in light of its long-term social returns and broader social significance."
Evaluated through that broader lens, a lot of investments that appear uneconomic may, in fact, be quite positive and sensible.
Much of the concern among economists abroad and within China, is not altruistically motivated. If it were, this interest in China rebalancing her economy in favour of consumption would be touching. Instead it (this concern) is inspired by an attempt to refocus China’s attention from production for exporting to production for domestic consumption — thereby resuscitating the prospect of manufacturing in America, Europe, Japan and others, who simply can’t compete as they once did. Hopefully, their yearning for the captive markets of imperialist times is destined to go unsatisfied.
I take your point. I was trying to illustrate the pro-Western politics that underlie supposedly ‘well meaning’ prescriptions for how China should grow her economy. It’s Pettis I had in mind. But, that said, I’ve noticed, too, how many Chinese economists who are into this ‘consumption led’ new orthodoxy just happen to have been educated in the United States. Not everyone, obviously, but many. Try it for yourself.
Yu’s analysis is actually orthodox economics of long term growth. Whereas Pettis (apparently a professor of finance, not economics) is in the fringe. At least that’s my reading of economics.
Yu notices that “There is, of course, also a wealth effect: a decline in house prices reduces the consumption demand of homeowners, especially property investors.” But his options for government policy are selective and incomplete. He argues that the government has plenty of borrowing power but doesn’t consider a big bang property sector bailout. His insider status suggests such a proposal is politically unacceptable.
Instead, Yu is enthusiastic about opportunities to grow infrastructure investment. Infrastructure is unlike other businesses. It’s either an existing, regulated business or a greenfield investment but in neither case are prices exposing opportunities for more “roundabout production,” which Yu believes, following the Austrians, motivate entrepreneurs. For that reason infrastructure investment is more likely to be unable to pay for itself. His cites Japan as evidence of the unsoundness of traditional fiscal indicators but not as a cautionary tale about relying on infrastructure investment to end debt deflation.
Bottom line: Net exports were the difference between China in the five years following its property collapse and Japan halfway through its first lost decade. For the political economy reasons Yu identifies, it will be hard for them to prevent a Japan-like next five years.
A take on Chinese Fiscal Architecture: https://igreaterchina.substack.com/p/the-fiscal-architecture-of-chinese?utm_campaign=post-expanded-share&utm_medium=web
He evades a basic problem of every capitalist economy, including China: investment is for profit. He observes that infrastructure investment is for social benefit regardless of whether a particular project is profitable. In the large, however, these investments must be financed out of surplus value. The problem of Chinese capital is that it cannot find enough profitable investments to keep capital accumulation going. The classic monopoly capitalist escape from this dilemma is export of capital and conquering markets in other countries.
A very useful piece, especially in forcing precision on what we mean by “consumption-driven growth.” But two elements seem missing, and they matter for the policy conclusions.
First, the analysis is effectively conducted in a closed-economy framework. Net exports are virtually absent, which implicitly assumes China can resolve its demand shortfall internally. In practice, when domestic demand is weak and investment efficiency is declining, the external balance becomes a key adjustment margin. Ignoring it sidesteps the question of whether part of the adjustment is being externalized through larger surpluses—precisely where international tensions arise.
Second, Yu treats overcapacity largely as a sectoral phenomenon that will self-correct through standard market mechanisms. This abstracts from the broader role of industrial policy in China. In practice, credit allocation, fx policy, subsidies, and policy support to capital-intensive sectors do not just shape supply at the sector level but also systematically affect income distribution. By channeling resources toward corporates and local governments, these policies tend to suppress the household share of income and reinforce high savings.
Once these two elements are brought back in, the case for resolving current imbalances primarily through investment expansion looks less straightforward, and the trade-offs become more explicit.
Yu Yongding's analysis offers a compelling corrective to the consumption-boosting prescriptions that have dominated recent discourse on China's economy. Western economists advocating a shift toward domestic consumption in China are not acting without motive: a China that consumes more imports less competitively, reduces its trade surplus, and opens its vast market to foreign goods and services in ways that benefit Western exporters and multinationals. The advice, however well-packaged in the language of rebalancing and long-run welfare, conveniently aligns with the commercial and geopolitical interests of the economies offering it. Yu Yongding exposes the theoretical confusion underlying this advice by drawing a sharp distinction between growth theory and macroeconomics: in the long run, growth is driven by capital accumulation, labor, and technological progress, not by consumption, which enters no standard production function as an independent variable. To conflate the demand-side short-run role of consumption with a structural growth engine is precisely the logical error he identifies as endemic to the current debate.
Yu Yongding's investment-led framework is not merely theoretically coherent; it is specifically calibrated to China's present circumstances in ways that Western consumption-led models manifestly are not. The Western path of consumption-driven growth, sustained over decades by financial liberalization, cheap credit, and the hollowing out of industrial capacity, has produced structural consequences that are difficult to ignore: chronic current account deficits, deindustrialization, an expanding rentier class, sovereign and household debt at historically elevated levels, and an atrophying of the planning and coordination capacity needed to build the physical foundations of a modern economy. China, by contrast, retains exactly the fiscal instruments, productive capacity in steel and cement, and institutional coherence to direct investment toward infrastructure that is, as Yu Yongding carefully documents, far from saturated. The fiscal space exists, ten-year yields confirm market confidence, and the project pipeline is real. To abandon investment-led growth at this juncture in favor of a consumption model whose Western exemplars are themselves struggling with productive decline and mounting debt would be to trade demonstrated strength for an imported vulnerability.