China's abundance: Managing transition through investment

Editor's note: Warwick Powell is adjunct professor at Queensland University of Technology and a senior fellow at Taihe Institute. The article reflects the author's opinions and not necessarily the views of CGTN. 

Recent commentary about "overcapacity and "involution" in the Chinese economy has reignited a familiar refrain: that China has hit the limits of its investment-led growth model and must now pivot sharply toward consumption. Yet this reading misconstrues both the structure of Chinese growth and the nature of current economic pressures.

In certain sectors, capacity has run ahead of demand growth. But this is not a uniform crisis of overproduction. Rather, it reflects temporary mismatches in the pace of expansion, shaped by expectations of stronger demand, evolving policy priorities and global market uncertainties. Aggregate demand - both consumption and investment - continues to grow in real terms, supported by public expenditure, infrastructure development, and steady income gains. The issue is not that demand is falling, but that capacity expansion in some sectors has outpaced the rate at which demand is growing.

To treat this as a systemic overcapacity problem requiring a retreat from investment would be a profound misdiagnosis. What's required instead is a more nuanced appreciation of how demand-led economies adjust dynamically, and how fiscal and structural policy can support that process while maintaining the long-term investment imperative. This is especially the case in a country where per capita income remains far from developed-world levels.

Sectoral imbalances, not generalized overcapacity

The concept of "overcapacity" is often used loosely, without sectoral specificity. In reality, China's productive base is undergoing complex realignments. Some sectors - such as new energy vehicles, high technology manufacturing, robotics, and such like - have seen rapid capacity expansions based on policy support that have continued to stay ahead of demand growth.

But this is not a crisis of absolute excess. Demand is still growing, just not fast enough to immediately absorb the available supply. Moreover, other sectors - particularly those linked to foundational services, green infrastructure, logistics, and digital connectivity - remain underserved, particularly in inland and rural regions.

Framing the issue as systemic overcapacity overlooks this heterogeneity. It also ignores the fact that in a large, transitioning economy, capacity expansion often anticipates future demand. If the adjustment lags, that is not evidence of structural dysfunction but of the normal cyclical dynamics of investment-led development.

Demand-led growth: Exogenous impulse, induced investment

A better way to understand China's current juncture is through the lens of demand-led growth theory. In this framework, the growth path of output is driven in the first instance by autonomous (exogenous) sources of demand - such as government or public investment and targeted public consumption. These components provide the initial impulse, to which private investment responds as a derived or induced activity. Growth in non-government finance over the past 12 months in non-property areas shows ongoing entrepreneurial demand for credit.

In this setting, temporary imbalances between capacity and utilization are not just likely - they are a feature of the adjustment process. When autonomous demand slows - due to policy recalibration, shifts in trade conditions, or global shocks - capacity that was installed in anticipation of higher demand growth may temporarily appear excessive.

The immediate response is not disinvestment, but reduced utilization. Firms scale back production while attempting to sustain volume through price discounting, especially in sectors where fixed costs are high. This can intensify competition, compress margins, and place financial pressure on weaker players, especially those with older equipment or limited access to credit. Eventually, some firms exit, older capacity is scrapped, and the remaining capacity is absorbed as demand continues to grow. The challenge in this context is to enable this process to unfold as orderly as possible.

This is a feature of intensive market competition but enhanced institutional design through legislative reform can mitigate disorderly exits and consolidation and support minimal social disruption due to disturbances to local labor market conditions. As consolidation takes place, intense competition will tend to taper off.

This is the normal operation of adjustment in a demand-led economy. It is not a sign that investment has become dysfunctional, but that expectations need to re-align with the actual pace of demand growth, which is a process that fiscal policy can support and guide.

Fiscal policy and the role of stimulus

In this context, fiscal policy becomes central, as a structural enabler of the long-run growth path. Public investment and income-support measures drive autonomous demand, creating the conditions under which private investment is induced and capacity is brought into productive use.

Several key tools are available:

-Strategic capital replacement programs, such as green infrastructure upgrades, housing retrofits, and vehicle fleet renewals, help draw down idle capacity while reinforcing longer-term productivity gains.

-Targeted transfers and public employment programs, particularly in lower-income regions, improve income distribution and raise the marginal propensity to consume, strengthening the domestic demand base.

-Investments in foundational infrastructure - including health, education, logistics, and digital networks - close regional development gaps and create conditions for stable private sector expansion.

These forms of stimulus not only activate idle capacity, but also raise the future growth rate of autonomous demand, thereby supporting higher levels of induced private investment over time.

Income distribution: Unlocking demand potential

A critical yet often underemphasised factor in aligning capacity with demand is the structure of income distribution. China has made significant progress in reducing inequality over the last decade, but disparities remain, notably between urban and rural areas, coastal and inland regions, and among different income groups.

Low-income households tend to have a higher marginal propensity to consume. Raising their incomes - through public services, wage growth, and employment in foundational sectors - translates into more robust and reliable domestic demand. This not only helps absorb capacity in consumer goods sectors, but also creates a more balanced and inclusive growth dynamic, in which investment and consumption reinforce each other.

Improving income distribution is not a substitute for investment. It is a complement to it. It ensures that the benefits of investment are more evenly shared and that the demand generated by rising productive capacity finds a domestic base of consumers ready and able to absorb it.

Global implications: From abundance to Accessibility

One final dimension too often ignored in some of the commentary is that China does not operate in a closed system. Its productive capacity - even when temporarily underutilized - plays a vital role in making goods affordable across the Global South. From solar panels and electric scooters to household electronics and machinery, and increasingly electric vehicles, Chinese firms price people in through productive abundance. The logic of high-volume production at slim margins enables access to products that would otherwise remain out of reach for many developing economies.

This stands in contrast to the Western rentier-centric model, which sustains profitability through enforced scarcity, intellectual property gatekeeping, and concentrated pricing power. That model prices people out via confected scarcity. Scarcity and high prices is by design. China's model, by contrast, is based on productive abundance, built on decades of investment in infrastructure, education, logistics, and manufacturing ecosystems. Even when that capacity runs ahead of domestic demand, it serves a broader purpose - namely, lowering the global cost of development.

Attempts to frame China's industrial scale as "distortive" fail to reckon with this reality. What is framed in the West as "overcapacity" is, for much of the world, affordable access. The real question is not whether China should retreat from its industrial capabilities, but how the rest of the world can adapt to - and benefit from - a global economy where productive capacity is no longer confined to the advanced economies. It's only "excess capacity" when it's not western capacity.

From mismatch to momentum

The "overcapacity" debate needs to be reframed. What we are seeing is not an economy that has overbuilt in aggregate, but one that is navigating the complex dynamics of sectoral transition and spatial unevenness. Some sectors overshoot; others lag behind. But the overall growth story - of real demand expanding, of public investment remaining central, and of consumption potential rising with income - remains intact.

By managing these transitions intelligently, with fiscal coordination, a strong focus on income growth in rural areas and lower tier cities through ongoing public investment in these areas, regulatory and social support to enable industry consolidation to take place relatively smoothly, and attention to developing the foundational economy of local services, China can ensure that investment remains the backbone of development, even as the structure of demand evolves.