Investing in People—or Just More Things? | Economic Digest: June 2026
Local Government Financing | Structural Splits | Rebalancing, or Just Adjusting the Course? | Capital Markets | Property Market | Artificial Intelligence
The death of the veteran market economist Gao Shanwen last week brought forth a series of eulogies for a macroeconomic analyst who, as some Chinese obituaries put it, “dared to speak up”. Gao is best known internationally for openly questioning China’s post-Covid growth numbers in front of an audience of investors in 2024, a striking breach of the usual boundaries of public economic commentary.
Still, the temptation to depict Gao as a rare truth teller within a supine profession, though common enough in comments on Xiaohongshu and revealing of frustration with official control of economic narratives, does a disservice to other Chinese economists. It also does not reflect how even establishment economists see their fellow practitioners: just last month, Justin Yifu Lin criticised the dampening effect of other economists’ pessimism upon public expectations. The economists in question might respond that probing the structural underpinnings of China’s economic trajectory is a more useful exercise than producing “positive energy”.
Usually, economic critiques take less overt forms than the public doubting of official statistics. The Chinese obituaries for Gao ground his reputation not just in his frankness, but rather in his unusual ability to combine the broad perspective of policy statecraft with the instincts of a sell-side strategist. That reputation was established after 2006, when he correctly foresaw that industrial overcapacity and weak returns on productive investment in China would channel liquidity generated by China’s trade surpluses towards equities and property, driving a prolonged upward revaluation of these assets (cf. the subsequent property boom).
That mode of structural diagnosis continues. In a piece surveyed here, Li Xunlei, chief economist at Zhongtai Securities, echoes Gao’s classic analysis of asset revaluation with an account of how industrial overcapacity and asset inflation interacted in China’s post-reform economy. After 2008, industrial overcapacity and weak household purchasing power allowed the money supply to grow without comparable consumer-price inflation, while the surging property sector absorbed liquidity and became the main engine of credit expansion sustaining China’s investment-led growth model.
Since the property slump began in 2021, Li observes that credit generation has shifted away from land finance and towards bond issuance by local governments and SOEs. This may superficially accord with the policy objective of deepening capital markets, but it also amounts to a continuation—via new mechanisms—of public-sector balance sheet expansion to compensate for weak household purchasing power and sluggish private investment. Consequently, he expects the twin imperatives of financing technological investment and supporting an ageing population to keep government leverage on an upward trajectory for the foreseeable future.
However, with local governments financially stretched, the scope for further locally financed stimulus may be limited. Zhao Wei, chief economist at Shenwan Hongyuan Securities, shows that falling fixed-asset investment in April stemmed mainly from deleveraging by fiscally strained local governments, while reliance on fines, administrative fees and one-off asset sales to shore up revenues has increased in many provinces. Lu Ting, chief economist at Nomura, compares this phenomenon to Japan’s experience of balance-sheet recession, arguing that systemic debt is blocking the transmission of monetary loosening and stimulus into effective investment. He therefore calls for centrally coordinated support and tighter auditing of local governments as prerequisites for clearing out the bad debt and restoring broader demand and investment.
The familiar long-term prescription for reform of the economy is, of course, “investing in people”—boosting disposable income among households to restore demand and private investment. However, this slogan means different things to different people, and there are doubts among its strongest proponents about whether genuine household rebalancing will follow. Economists such as Li Xunlei, Lu Feng (卢锋, not the industrial economist 路风) and Zhang Xiaojing are in favour of deep, structural rebalancing towards households, but all note that institutional biases favouring quantifiable investment in industry make this extremely difficult. In another piece, Li raises the issue of a potential gap between rhetoric and actual policy in his aside on a recent Qiushi editorial.
They are probably right to be sceptical. Yin Yanlin, Vice-Chairman of the National CPPCC’s Economic Affairs Committee, and Lu Feng (路风), the influential industrial economist, explain in their analyses why the expansion of the services sector and investment in people ought not to be seen as broad rebalancing. In their view, implementation must proceed cautiously, selectively and strictly in light of the ultimate strategic priorities which, as both of them underline, are ensuring the primacy of investment and sustaining industrial vitality.
— James Farquharson
In Brief
Li Xunlei on China’s shifting engines of monetary expansion and rising public leverage.
Lu Ting on hidden bad debts and the limits of stimulus transmission.
Zhao Wei, Jia Dongxu & Hou Qiannan on the local fiscal strain behind the investment slowdown.
Zhang Yu on audit findings exposing distorted fiscal incentives and weak policy implementation among local governments.
Shen Jianguang on three expanding divides in the Chinese economy.
Guan Tao on China’s K-shaped economy and risky dependence on the global AI cycle.
Li Xunlei on the structural causes behind weak consumption, overcapacity and rising debt.
Lu Feng on the institutional reform required to rebalance supply and demand.
Zhang Xiaojing on how China’s growth model privileges producers over households.
Qu Hongbin on consumer demand as the missing link in innovation commercialisation.
Huang Yiping on reversing decades of wealth transfers from households to producers.
Liu Shijin on expanding the middle class and reshaping local fiscal incentives.
… or Just Adjusting the Course?:
Justin Yifu Lin on the flaws of three pessimistic takes on the Chinese economy.
Yin Yanlin on defining “investing in people” as targeted fixed-asset investment.
Lu Feng on services as an integral component of industrial strength.
Zhang Jun on strengthening original innovation rather than chasing fashionable technologies.
Wang Jian on a liquidity trap with Chinese characteristics.
Liu Xiaochun on trialling hybrid credit-equity financing for technology start-ups.
Zhu Ning on why seasonal sales improvement does not signal a national housing recovery.
Luo Zhiheng on uneven property stabilisation amidst declining systemic risk.
Zhang Fan on redesigning taxation for an economy less dependent on labour income.
Jiang Xiaojuan on AI’s unusually broad threat to educated employment.
Justin Yifu Lin on China’s advantages and constraints in the Fourth Industrial Revolution.