China's recipe for turbocharged growth
High-speed railways, ports, skyscrapers: China's growth formula rested on massive infrastructure investment. But the approach is running into its limits.
For decades the People’s Republic grew at breakneck speed. The main instrument: a massive build-out of infrastructure. New roads, rail lines and airports were constructed across the entire country. But the approach is running into its limits.
Background
When this report was made, China’s economy was still growing at rates of just under seven per cent per year – a slowdown from the double-digit growth rates of the 2000s, but still far stronger than any Western economy. The formula combined massive infrastructure investment (high-speed rail, airports, ports), export-oriented industrial policy, a rapidly growing urban middle class and a seemingly inexhaustible supply of liquidity from the banking system.
Beneath the surface the imbalances were already visible. Private consumption accounted for only around 38 per cent of GDP – in the United States the figure was around 70 per cent. The economy was highly dependent on investment, which increasingly rested on credit: total debt (state, corporate and household) rose from around 180 per cent of GDP before 2008 to well over 300 per cent by the mid-2020s.
Since the end of the zero-Covid policy at the end of 2022, the dynamic has slowed perceptibly. Growth rates are now around five per cent, in some quarters below – estimates by Western economists put the real figure lower still. The population has been shrinking since 2022; the real estate sector, once the driver of a large share of growth, has been in structural crisis since the Evergrande collapse. Youth unemployment rose to record highs, whereupon Beijing simply suspended the publication of the statistic.
China’s leadership is trying to counteract this with a new industrial policy for “new productive forces” – above all artificial intelligence, batteries, electric vehicles, semiconductors, biotechnology and robotics. Hundreds of billions in state subsidies are flowing into these areas. Critics at home and abroad warn, however, that overinvestment is creating global overcapacity and further inflaming trade conflicts with the United States and Europe.
What this report captures as a snapshot – China’s turbocharged growth as the normal state of affairs – has become history. Beijing faces the task of reorienting its economic model: away from property and debt-financed investment, towards technology and domestic consumption. Whether this restructuring succeeds is one of the defining economic questions of the coming decade.