China's economic momentum: Credit, circulation and the dynamics of structural transformation

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

Recent data from the People's Bank of China (PBOC) and China's National Bureau of Statistics paint a picture of resilient economic adaptation in China amid global uncertainties. Total Social Financing (TSF) stock reached 458.8 trillion yuan by the end of May 2026, up 7.7% year on year, with cumulative new TSF in the first five months hitting 17.48 trillion yuan. New yuan loans have rebounded, underscoring continued credit support for the real economy.

Simultaneously, household bank deposits have seen a rare two-month decline, with funds shifting toward non-bank financial institutions, wealth management products, insurance, and equities as deposit rates fall. This redeployment of "dormant" savings signals money re-entering active circulation. Complementing these trends, industrial profits have rebounded solidly, particularly in high-tech manufacturing and equipment sectors, with Q1 2026 profits for major industrial enterprises rising 15.5% year on year to 1.696 trillion yuan and high-tech manufacturing surging 47.4%.

Against a global backdrop strained by energy supply concerns — exemplified by disruptions from conflicts in the Middle East — these developments reflect not mere cyclical recovery but an ongoing deeper, policy-orchestrated structural transformation. In my previous analysis, integrating classical production theory with endogenous money dynamics and demand-led growth frameworks like Kaldor-Verdoorn, we can better appreciate how credit growth, profit realization, and sectoral recomposition are enabling China to raise its productive potential while navigating transitional challenges.

Credit growth as the foundation for profit realization

In monetary production economies, credit is not a passive intermediary but an active enabler of expansion. Enterprises advance costs — wages, materials, energy — before revenues materialise. Profits emerge only when these "price claims" achieve closure through actual sales, requiring sufficient liquidity and effective demand in circulation. Net liquidity expansion is a precondition for aggregate profit realisation: In a closed system, a firm's surplus necessitates expanded purchasing power elsewhere.

China's TSF growth exemplifies this. The PBOC's coordinated approach directs credit toward strategic priorities, supporting investment that precedes and generates income. This contrasts with loanable funds views that treat savings as a prior constraint. In China's model, investment drives incomes, with savings adjusting endogenously. The 7.7% TSF increase provides the monetary space for firms in high-tech and manufacturing to scale operations, validate costs, and realise surpluses.

This dynamic aligns with my analysis of liquidity's dual role. Faster credit growth not only finances higher investment and output but also improves working capital cycles and asset valuations, imparting a "liquidity premium" on profits. When credit acceleration slows, as during earlier real estate deleveraging, realization tightens — even at high absolute debt levels. Recent rebounds suggest policy is recalibrating to sustain momentum in productive sectors.

Mobilizing dormant savings: Money in motion

The decline in household savings deposits, offset by rises in non-bank channels, is particularly significant. Households are shifting from low-yield bank holdings toward higher-return or more liquid assets amid falling rates. Rather than being a sign of distress, it is one of confidence and opportunity. Real incomes, supported by productivity gains and policy measures, allow redeployment of buffers accumulated during precautionary phases.

Savings in China's context are largely a residual of rising real incomes rather than a binding constraint. Endogenous credit allows investment to expand the economy, generating the incomes that fund savings. The current mobilization reduces hoarding, boosts velocity, and expands the effective demand pool. Households drawing down dormant balances can sustain consumption even as distributional shifts (higher profit shares in upgrading sectors) moderate wage growth in some areas, and where there are some, albeit modest, upward pressures on consumer goods inflation. This "savings-augmented closure" helps bridge realization gaps during structural shifts.

In circuit terms (M–C–M'), credit-financed production raises incomes and output; redeployed savings validate expanded supply by enabling purchases. This counters underconsumption risks and supports the transition from property-heavy growth to high-tech manufacturing and services.

Rising profits and Sraffa-inspired structural change

Industrial profits' rebound, led by high-tech manufacturing (47.4% in Q1) and equipment sectors, reveals ongoing recomposition of the production system. Sub-sectors like electronics, semiconductors, optical devices, and intelligent equipment show explosive gains, while older vintages face margin pressures from "involution" (Nei Juan) — intense price competition among overlapping industrial capacities.

We can understand these dynamics when we analyze economies as interconnected systems where outputs of one sector serve as inputs to others, with technical coefficients determining relative prices and reproduction conditions under prevailing wage-profit distributions. Structural change involves shifts in these coefficients: Retiring lower-productivity methods (higher unit costs, labor-intensive) in favor of advanced ones  — higher fixed capital, complex intermediates, and innovation complementarities.

China is managing a "transitional overlap of industrial vintages." Legacy capacities from prior waves continue operating, generating competitive pressures, while new quality productive forces scale up. This is creative destruction managed through policy: Equipment renewal programs, consolidation to curb destructive pricing, and directed credit. Profits in core sectors (equipment manufacturing as the “structural backbone”) provide resources for reinvestment, raising overall productivity via Kaldor-Verdoorn dynamics — where output growth induces learning, scale, specialization, and embodied technical progress.

Empirical patterns confirm strong Verdoorn coefficients in China, with output shocks driving most productivity variance. High-tech value-added and investment outpace averages, PPI has turned positive, and modern services consumption accelerates. This is demand-led transformation, not static overcapacity.

We can further contextualize this: Autonomous demand (policy-led investment in strategic sectors) induces private investment and capacity expansion, with productivity feedbacks reinforcing growth. Credit and policy steer resources toward higher-complexity activities, altering inter-sectoral balances and distributional outcomes in favor of sustained accumulation.

Global energy context and thermodynamic resilience

These domestic shifts occur against global energy security challenges. Conflicts disrupt supplies, raising input costs. Yet China's advances in renewables, EVs, batteries, and efficiency improvements — sectors driving profit gains — have enhanced its energetic metabolism. By building domestic supply chains and exporting green tech, China reduces vulnerability to hydrocarbon chokepoints while supporting global partners, particularly in the Global South.

I also suggest that it is useful to frame modernization partly through a materialist, thermodynamic lens: Raising energy return on energy invested (EROEI) and reorganizing production for resilience and abundance. Use-value expansion (more physical output, lower unit costs in key goods) supports real living standards even amid nominal adjustments or "good deflation."

Challenges and Policy Horizons

Transitional frictions persist, of course. Uneven sectoral impacts, external uncertainties, and the need to balance profit realization with broad-based demand remain critical issues to watch closely. Managing involution requires continued emphasis on quality competition, consolidation and innovation. Sustaining credit momentum without excess will be key, while mobilizing household balances productively. Geographic and demographic rebalancing — supporting inland and rural incomes — remains vital.

Policy tools like equipment upgrades, consumption supports, and industrial guidance demonstrate capacity for adaptive orchestration. Unlike narratives fixated on debt levels or consumption shares in isolation, we can instead focus on production conditions, monetary circulation, and cumulative causation. Investment-led growth, properly directed, expands the pie for all.

A trajectory of purposeful modernization

China's current indicators — solid credit growth, savings mobilization, and profit-led upgrading in strategic sectors — signal a system in dynamic recomposition. We can and should reject simplistic "debt trap" or "overcapacity" tropes, and instead emphasize how policy coordinates credit with structural shifts in technical coefficients and demand conditions to realize profits and raise productive forces.

This path positions China to export productivity gains (machinery, green technologies) while deepening domestic resilience. In a multipolar world facing energy and supply chain stresses, such transformation offers lessons in purposeful development: Credit as a tool for realization, circulation as the bridge between production and consumption, and structural change as the engine of long-term prosperity. A subsidiary benefit is that Chinese capacity is supporting a world in need for energy transition.

As global headwinds persist, China's focus on high-quality, innovation-driven growth — anchored in material realities and monetary dynamics —provides a stable foundation. The data affirm not fragility but adaptive strength, validating a model where investment, policy direction, and market mechanisms together advance shared modernization goals. With continued calibration, this trajectory promises sustained improvements in living standards and global contribution.