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Pointing to China’s anaemic private consumption rates, economists have long advocated boosting growth through measures such as expanding China’s parsimonious social safety net. Despite paeans to “common prosperity”, Beijing has shown little inclination to do this.

Instead, China has been focusing unusually strong on export for a very long time. Chinese leaders definitely see strategic utility in ensuring that G7 nations are reliant on China for critical technologies. Yet, with most of China’s population still poor by advanced economy standards, this dynamic can be over-egged when explaining China’s export overcapacity and aggressive push into Western markets.

At the same time, China’s overcapacity has proved corrosive to the industrial ambitions of lower and middle-income countries. Rather than offshoring more labour-intensive industries as has been hoped, President Xi has called for the “transformation and upgrading of traditional industries”. Chinese manufacturing imports from these countries have declined appreciably.–

• Provincial government land markets and local government financing vehicles (LGFVs) may seem arcane and far removed from global trade. But in reality, they have served as the edifice upon which China’s now slowing investment-led growth model has been built.

• With Beijing deeply reluctant to embrace consumption-led growth alternatives, leaders are betting on exports to take up a much larger share of the slack. China invests about 45 per cent of its GDP – an unprecedented figure for any modern economy. Until recently, infrastructure and property have routinely each comprised about 30 per cent of this total. The idiosyncrasies of China’s political economy and fiscal composition mean that much of this investment has been driven by local governments.

• To maintain services provision while meeting aggressive growth targets, local governments have become reliant on non-tax funding – i.e., LGFVs [LGFVs are off-balance financing vehicles used by local governments to circumvent restrictions on issuing conventional bonds] and land sales. The latter constituted 42 per cent of local governments’ general public budget revenue in 2021 – a figure that is still above 20 per cent.

• LGFVs played an essential role in funding China’s colossal infrastructure buildout, which has also helped drive up land prices in what was previously a virtuous growth cycle. In the heady days before China’s real estate collapse, land revenue provided an ostensibly inexhaustible source of largesse for subsidies.

• This growth model was not without its drawbacks. After decades of bingeing, LGFV debt comprises well over half of China’s GDP [some economists claim that LGFV debt has reached almost China’s GDP, ed] – a totally unsustainable dynamic when median return on assets has hovered around one per cent. Local governments are now spending around 19 per cent of total fiscal resources on interest payments.

• Earlier this year, Beijing drastically restricted the ability of the 12 most indebted provinces and municipalities (whose cumulative investment comprised 16 per cent of China’s total in 2023) to tap LGFVs for infrastructure spending. Investment in these regions is expected to decline by around one-quarter this year. Restrictions of varying severity have been placed on 18,000 LGFVs across China.