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Demystifying China's macroeconomic policy. Sign up for free updates read by the World Bank and J.P. Morgan:
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So the real lesson may be even more interesting.
Hong Kong achieved Asian-Tiger levels of growth despite one of the most distortive land regimes in the world. Not because of it. Despite it.
The broader implication is that the case for industrial policy is weaker than many think. The East Asian miracles are often presented as proof that governments must guide development. But Hong Kong shows "maybe not".
Friedman did not overstate Cowperthwaite's contribution. He simply misidentified how it came about.
🚗🔋 Many think Beijing masterfully planned China's EV takeover. Fengming Lu (@ANUBellSchool ) and I spent 3 years and 60+ interviews finding out what actually happened in our latest article @TheChinaJournal. A thread 🧵
It was totally demand - management drive in the wake of the GFC, given Beijing's ability to abruptly launch mass stimulus because it doesn't need to first pass appropriations bills through an adversarial Congress.
A state-owned transit system that runs at a loss is fine, as long as it boosts tax revenues to compensate for the losses by serving as a conduit for expanding economic activity.
One of Xi Jinping's core economic convictions is exactly the same as that of classical liberal economist Jean-Baptiste Say.
According to Chinese political scientist Zhang Weiwei, Xi is firmly convinced that infrastructure spending is justified by the fact that "supply creates its own demand" (1:20 mark).
Meanwhile on Chinese TV: "I visited California in the 80s. They were promising high-speed rail. China didn't even have highways."
40 years later, they have built zero. China: biggest high speed rail network.
"The superiority of socialism is clear."
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Beijing is moving to give its outbound investment regime a legal backbone.
State Council regulations released on 1 June, the first administrative rules specifically covering outward investment, take effect on 1 July 2026. The 34-article framework covers three areas: services for firms investing abroad, oversight of those investments, and protections for investors whose interests are threatened offshore.
The regulations are worth reading alongside Beijing's broader foreign-relations legal architecture. Explicitly linked to the Foreign Relations Law, the Anti-Foreign Sanctions Law, and the Export Control Law, they include authority to impose countermeasures against governments or organisations that impose 'discriminatory restrictions' on PRC investors abroad. That is less a guarantee of open markets than a formalised tool for retaliation, calibrated, legal, and now on a statutory footing.
source: https://t.co/GZibUJGhe6
read more analysis—link in bio
It just does not make sense for Beijing to want China's economy to be dependent upon export/external sources of demand during a period of mounting geopolitical tensions starting almost a decade ago.
The fact that Chinese policymakers and pundits themselves repeatedly state that domestic demand and consumption are too low should be telling enough.
It's not a matter of them being disingenuous or mendacious - it's a matter of effective economic policy-making being a hard task - even in an authoritarian state which can bypass legislative bickering.
If you read domestic commentary and discussion Brad - the you see here about a mounting trade surplus and the problems that it causes for China are concerns they share as well.
Very much hope China delivers on these goals --
But some skepticism is warranted. The trend over the last 10ys has been a smaller contribution from consumption to GDP growth and a bigger contribution from net exports
It's incredible how facile untruths about China are so readily believed by those in positions of influence.
Improvements to the social safety net and increases in transfer payments lie at the core of fiscal policy for the 15th Five Year Plan (2026 - 2030).
The goal of course is to reassure Chinese households so they spend more, satisfying the macroeconomic imperative of increasing domestic consumption.
Many people in the west don't realise that Chinese communists make Ronald Reagan look like an extreme redistributionist. In today's China personal taxes are ultra-low and there is very limited provision of free public services. Xi's views on the welfare state would be labelled 'far right' in the west, illustrating - yet again - the horseshoe theory of the far left and the far right bending towards each the further to the extremes they go.
This argument keeps misdescribing what China’s actual sources of competitiveness are, then treating those bad descriptions as explanatory.
Rather than rebut every bad conclusion, it's more useful to identify and refute the false premises causing most of the damage. Let's go:🧵
@gonglei89 China should just serve as the object lesson that the state needs to play a far greater role in economic management than the mainstream right-wing opinion has asserted ever since Thatcher and Reagan came to power.
A piquant take on China's housing market that could well prove to be true.
Pushing house prices down 40% to what they were 10 years ago while incomes doubled in a country that still needs to urbanize ~200 million people and could still improve housing for another ~300 million will one day be remembered as one of the greatest wealth transfers in history.
True.
It's the insight of Karl Polanyi so beloved of Brad DeLong - should man serve the market or should the market serve man?
Beijing has decided the later - in what the economist Isabella Weber reckons to be a venerable trait of China's traditional system of political economy.
I'm never in a hurry to have peremptory opinions on complex topics with unforeseen consequences, like asset markets in massive economies.
Looking at the state of housing markets in the Anglosphere and the extent to which this has deeply adverse impacts on society as a whole, I am very open to your take on the matter.
It would be correct to say: “China subsidizes its auto industry more than other countries.”
It would also be correct to say: “Many countries subsidize their auto industries, not just China.”
The Communist Party should receive more credit for tenacity and long-term policy consistency, as opposed to prescience and foresight (they tend to pivot-step quickly in response to unforeseen contingencies as opposed to anticipate them in advance.)
The basic thrust of Xi's new investment campaign has been around since the Jiang Zemin - Zhu Rongji era of the 1990s - it's been one of the main development themes for Beijing throughout most of the reform era at this point.
Analysts say Xi Jinping's plan for a new, years-long investment push of its western regions will transform an area that covers close to one third of China’s landmass, an area roughly ten times the size of the UK and comparable to much of western Europe. https://t.co/nige5dyGUm
The new OECD report claims that 60% of China's market share gains in key industries were due to subsidies.
But there are reasons to be cautious about this estimate.
They're estimating a "predicted market share gain" from subsidies relative to actual market share gains. But the "predicted market share gain" is actually a mechanical result based on other econometric work done to estimate the general market share gains due to subsidies (done in another OECD paper).
How they determine the effective "coefficient" of market share gains due to subsidies? This is quite tricky because of confounding factors like the fact that industries or firms receiving subsidies are not randomly selected and that there could be reverse causality or other correlated factors involved.
How do they get around this confounding factor issue to go from correlation to an estimate of causal effect? One is through IV regression, instrumenting on lagged subsidies, which could be correlated (thus weak external validity). Another is through generalized propensity scores to create a balanced weighted panel, but these by definition can't capture unobservables, which are likely very important.
Maybe later I or someone else can dig in further on the econometric analysis to show that this might be an interesting back-of-the-envelope estimate but far from a rigorous estimate that should be used for policy.
https://t.co/Z62cErIbFW
So much of China's industrial development advantage is predicated upon Beijing's treatment of the financial system as a critical state-owned utility.
This OECD report is highly timely and confirms many of my observations over the years. Interestingly, many of its findings are echoed in Xi’s latest essay in Qiushi, where he openly reaffirmed China’s commitment to an aggressive state-led industrial policy.
First, Xi emphasized that in recent years the Party leadership has attached great importance to the development of “industries of the future,” strengthened strategic planning and policy support, and pushed China’s overall competitiveness into the world’s top tier, with more sectors moving from “catching up” to “leading.” This directly reinforces the OECD’s finding that Chinese firms have rapidly expanded their global market share across multiple industrial sectors. The most striking example is solar panels, where China’s share of global production rose from 14% to 87%.
Second, the OECD report highlights the extraordinary scale of Chinese subsidies. In semiconductors, the average global subsidy level amounted to just over 2% of company revenue, while subsidies for Chinese firms reached nearly 10% of revenue in 2021 and 2022. Yet even subsidy levels five times the global average appear insufficient from Beijing’s perspective. Xi explicitly called for “extraordinary measures” to intensify breakthroughs in key core technologies and resolve the “bottleneck” problems constraining future industrial development. If five times the global subsidy norm is considered ordinary, one can only imagine what Beijing means by “extraordinary measures.”
Third, financial tools remains central to China’s industrial strategy. Xi’s discussion of creating a “favorable policy environment” focused heavily on state financial support, including fiscal and tax incentives, technology finance, venture capital, and government procurement.
Taken together, both the OECD report and Xi’s essay suggest that China’s subsidy race is not slowing down — it is intensifying, particularly in sectors Beijing considers strategically critical. According to Xi, these priority industries include quantum technology, biomanufacturing, hydrogen energy, nuclear fusion, brain-computer interfaces, embodied AI, and sixth-generation mobile communications.
https://t.co/dPmaXl2SfP
If you actually read what Chinese economists and policymakers are saying, then you know that the second-half of this insight from @palmapolyak is very much off the mark - and probably has been for over a decade:
"When growth slows, policymakers know how to build more infrastructure or support another industrial project. They are far less willing to address the institutional causes of weak household demand."
The fiscal policy discussion in China right now revolves around the institutional problems that cause weak household demand, and how to best address them in future, so that the economy can achieve more sustainable growth over the long-term.
The key theme for fiscal policy in China's 15th Five Year Plan (2026 - 2030" is shifting from infrastructure investment towards "investing in people."
This means investing in both improvements to human capital to drive long-term productivity gains, as well as improvements to the social safety net to help drive higher levels of discretionary spending.
It's very much arguable that this shift began in 2013, when fiscal policy under first-term Xi Jinping began to place far more stress on "cuts to taxes and reductions to government fees" as opposed to spending on infrastructure.
This was in response to concerns over the run up of copious amounts of hidden debt by local governments, who were responsible for the execution of the king's share of the four trillion yuan stimulus plan launched by Wen Jiabao in 2008, to deal with the fallout of the Global Financial Crisis.
It's not a good idea to impute too much prescience to China's policymakers, or to make assumptions about their intentions just because certain policies do not prove effective.
What is undeniably true about them, however, is that they have greater long-term consistency than other nation-states, due to the institutional features of the current system.
The structural shift in fiscal spending to support greater household consumption has been a theme for Beijing for likely over a decade - because they became deeply concerned after the Wen Jiabao stimulus about the perils of too much infrastructure investment driven by concealed leverage.
"China’s growth model looks far less coherent than either its admirers or critics suggest."
https://t.co/bUhwueYM71
Wery well said by @palmapolyak
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