THE RETURN TO INFRASTRUCTURE-LED GROWTH / PROJECT SYNDICATE

The Return to Infrastructure-Led Growth

Given China's disappointing forays into consumption stimulus over the past few years, there can be little doubt that its recent strategic shift back toward infrastructure-driven growth is fully justified. All the talk among international commentators about overcapacity ignores the realities on the ground.

Yu Yongding

BEIJING—China’s first-quarter year-on-year GDP growth rate of 5% indicates that the sustained slowdown seen in the second half of 2025 has been reversed. 

In March, the producer price index rose by 0.5% year-on-year, ending 41 consecutive months in negative territory. 

Nonetheless, the fundamental problem of insufficient effective demand remains, which means that authorities are likely to continue proactive fiscal and monetary policies, while remaining vigilant against the effects of oil-price fluctuations and other external shocks.

The most striking (and encouraging) feature of China’s economy so far this year lies in infrastructure investment, with annual growth surging sharply, from -2.2% in the first quarter of 2025 to 8.9% in January to March.

This differentiates China from advanced economies such as the United States and European countries, where macroeconomic policymaking focuses primarily on achieving full employment and maintaining price stability. 

These countries’ macro policies are not tailored to specific demand components. 

Both consumption and investment are determined by households and enterprises, which seek to maximize utility and profits within a given macroeconomic environment shaped by interest rates, liquidity conditions, and the overall scale of fiscal revenue and expenditure.

In China, by contrast, distinct institutional arrangements enable the government not only to regulate infrastructure-investment growth, but also to leverage it as a policy tool for macroeconomic stabilization—a counter-cyclical approach that has proven effective over time. 

Ever since the post-1978 era of “reform and opening up” began, Chinese authorities have addressed insufficient effective demand by turning up the dial on infrastructure investment (scaling it back during periods of overheating).

Hence, when China launched its massive CN¥4 trillion ($586 billion) stimulus package in 2009, the strategy was to promote consumption through investment and fuel economic growth with stronger consumption, not to target household consumption directly. 

Infrastructure investment duly shot up by 44%, allowing China—unlike G7 economies—to weather the global financial crisis with no decline in GDP. 

Between 2007 and 2011, China’s share of global GDP increased from 6.2% to 10.3% at current exchange rates, and from 11.5% to 14.5% in purchasing-power-parity terms.

But while China outperformed its peer economies during the post-2008 crisis era, this strategy inevitably produced side effects, including redundant construction, white elephants (costly infrastructure projects that serve little or no purpose), greater shadow-banking risks, ballooning local-government debt, and a runaway housing bubble.

Moreover, many economists dismissed the 2009 stimulus package as a failure, which in turn led them to reassess the rationale for relying on infrastructure investment as a means of economic stimulus. 

The view that China is mired in overcapacity and that infrastructure construction has long reached saturation has gradually become the conventional wisdom.

But an important turning point came near the end of 2022 and the beginning of 2023, when the government stated that “insufficient aggregate demand” was a major problem.

Starting in 2024, a wide range of consumption stimulus policies were rolled out, including trade-in subsidies, vehicle-purchase tax credits, consumption vouchers, interest subsidies for personal consumption loans, improved social security and livelihood benefits for low-income groups, and cultural, tourism, and catering subsidies. 

Some of these measures had previously been introduced on a much smaller scale; but in 2025, fiscal allocations for consumption stimulus were estimated around CN¥600–700 billion by market analysts.

Yet despite having yielded positive results, these policies failed to halt the 2025 slowdown in retail sales. 

Because household consumption is determined by current income, future income expectations, and household wealth, it will ultimately reflect permanent income levels. 

Without consistent growth in disposable incomes, improved income expectations, and an end to household wealth depreciation, temporary bursts of stimulus can hardly drive strong, lasting consumption growth. 

Although a significantly larger expansion of consumption subsidies and cash handouts could lift household spending in the short run, such growth would be unsustainable and probably inflationary after a time lag.

By contrast, infrastructure investment has a far larger multiplier effect than consumption stimulus, as extensive empirical studies conducted both in China and abroad have shown. 

Government-led infrastructure investment first creates new income for enterprises, and those gains are then amplified by consumption multipliers and crowding-in effects, delivering a much stronger boost to the overall economy.

Moreover, there is no need to worry about overcapacity caused by expanded infrastructure investment, because once the deflationary pressures fully recede, the government can moderate the pace of infrastructure expansion to lower the investment rate and raise the consumption rate. 

In the long run, the growth rates of investment and consumption will converge with potential GDP growth, keeping the investment rate and consumption rate at socially acceptable and stable levels.

More importantly, China is not merely toggling investment levels. 

To participate fully in the Fourth Industrial Revolution (digitalization and AI), join the ranks of moderately developed countries in terms of income per capita by 2035, and safeguard national security amid complex geopolitical dynamics, the 15th Five-Year Program includes a strategic blueprint for building a modern infrastructure system.

This system will comprise six major nationwide networks: comprehensive transportation, energy, water conservancy, new-generation information and communications technologies, integrated national computing power, and urban underground pipelines. 

Market projections suggest that total infrastructure investment will reach a gargantuan CN¥40 trillion under this five-year plan, with annual average investment exceeding CN¥7 trillion.

The growth momentum from such large-scale infrastructure spending is self-evident, and given China’s fiscal position, high propensity to save, vast social assets, and foreign net assets, these projects will be eminently affordable. 

That means China’s strategic shift back to infrastructure-driven growth stabilization is fully justified. 

Despite existing institutional and operational challenges, China is fully capable of achieving an annual GDP growth rate of 4.5% to 5% in 2026.

Yu Yongding, a former president of the China Society of World Economics and director of the Institute of World Economics and Politics at the Chinese Academy of Social Sciences, served on the Monetary Policy Committee of the People’s Bank of China from 2004 to 2006.