Many analysts see a contradiction at the heart of debates over the Chinese economy. On the one hand, some argue that China has been overinvesting at a growing scale. This overinvestment, they claim, is responsible for China’s soaring trade surpluses and rapidly rising debt burden, which together increase the likelihood of the economy facing a Japan-style rebalancing period of much slower growth.

Others point out that China’s exports are booming, it has built some of the most impressive infrastructure in the world, and has made remarkable technological advances—in some areas catching up to, and even surpassing, the United States. In the words of the Global Times, it is a country of “high-speed trains racing across the land, power grids reaching millions of households, factories accelerating smart and digital transformation, and platforms reshaping production and distribution methods.” These successes, they argue, contradict the view that China’s economy is on an unsustainable path, because an economy cannot be both in trouble for overinvesting and also achieving such extraordinary real-world results.

But in fact, there is no contradiction. Both stories are true: They are not competing narratives but different ways of seeing the same Chinese economy. China’s surging trade surplus, its high-quality infrastructure, and its technological advances do not refute the claim of overinvestment. On the contrary, they may actually support it. The irony is that while China is providing the world with the “gifts” of improved technology and advanced infrastructure, it may be doing so at a significant cost that may eventually bankrupt the economy.

The confusion arises from a misunderstanding of what “overinvestment” means. It does not imply that investment fails to produce physical assets or technological progress. On the contrary, overinvestment often results in real improvements in infrastructure and technology. High-speed rail networks, modern airports, advanced manufacturing capacity, and cutting-edge research capabilities are exactly what one would expect from an economy that channels an excessively large share of its resources into investment.

It is nonetheless “overinvestment” if it generates less real value than it costs in resources—including subsidies and transfers. If investing $100 of real resources produces more than $100 in value, the investment is sustainable and leaves the economy better off. If it produces less, no matter how technologically advanced, it is ultimately unsustainable and leaves the economy worse off. In that case, the gap between cost and value must be absorbed somewhere—typically through rising debt and capitalized losses.¹

Eventually, once debt is no longer able to rise quickly enough to fund old and new investment losses, the process will stop. When that happens, the losses will finally be amortized in the form of direct or hidden transfers and a reversal of the GDP growth artificially created by capitalizing the original losses.²

What Drives Chinese Investment?

This isn’t a recent problem. There have been growing concerns during the past ten to fifteen years about the economic viability of Chinese investment, largely because much investment in this period seems to have been driven not by the underlying requirements of the economy but rather by the political need to maintain high levels of GDP growth. Because Beijing—in spite of many years of promises—has not been able to accelerate consumption relative to GDP growth. High GDP growth targets are effectively also high investment growth targets, with the latter much easier to control. That is why Beijing has placed so much emphasis on maintaining high investment levels. 

For example, after the 2008 financial crisis caused a collapse in China’s current account surplus equal to 7 percent of GDP, Beijing responded with a surge in infrastructure investment, even though, by this period, China already had some of the best infrastructure in the world. While widely applauded at the time, it was soon recognized that this surge marked the beginning of a very rapid rise in the country’s debt burden—which over the past fifteen years, has been historic.³

This recognition occurred fairly quickly. But when efforts to bring infrastructure investment growth down by the middle of the decade created downward pressure on the economy, China experienced a stock market crash and capital flight severe enough to threaten domestic monetary conditions. Beijing responded by unleashing a new wave of household borrowing in the property sector—reducing mortgage rates, lowering minimum purchase requirements, and eliminating buying restrictions—even though residential property prices were already at historic highs relative to household income, and the property sector already represented a worryingly large share of the economy.

This latest stage of China’s property bubble was only able to continue for a few years. When it collapsed in 2021–2022, Beijing once again responded by preventing an overall slowdown in investment growth. China’s financial system was directed to unleash a massive increase in manufacturing investment—even though much of the sector was already suffering from weak pricing power, rising inventories, and excess capacity—such that within a few years the extent of excess capacity became what is now termed the “involution” crisis.⁴

Beijing responded to involution by cutting investment in the most affected sectors, but this simply shifted the burden of maintaining overall investment growth elsewhere. As investment retrenched in some sectors, political constraints meant that it had to expand in others, and we are already seeing in 2026 an acceleration in non-involuted manufacturing investment and, especially, in infrastructure (in the first quarter of 2025, China’s 5 percent growth in GDP was driven mainly by an 8.9 percent increase in infrastructure investment).

In short, what has driven investment acceleration in property, infrastructure, and manufacturing has been less the actual needs of the economy than the political imperative to keep GDP growth targets high. China meets these targets in part by transferring resources from households to subsidize state and corporate investment. One result is that China has sustained rising levels of investment even as the marginal return on that investment has declined, and in many cases, turned negative.

When investment exceeds what can be profitably absorbed domestically, the excess shows up in at least three ways. First, it leads to rising debt burdens, as resources directed into projects exceed their contribution to real economic value. Second, it leads to trade surpluses, as excess production is exported abroad. And third, because it is funded in part through transfers from households, it prevents the consumption share of GDP from rising.

That is why, despite repeated promises to rebalance toward consumption, Beijing has been unable to get consumption growth to accelerate. In this sense, China’s rising debt burden, its external imbalances, and its weak domestic consumption are not contradicted by the quality of its infrastructure and technology—they are direct consequences of the same underlying process.

We’ve Seen this Story Before

There are historical precedents for this process. In the 1960s, in an attempt to grow its way out of its own deep imbalances, the Soviet Union invested heavily in science and technology, achieving notable successes in areas such as aerospace, computers, and military technology. It narrowed the technological gap with the United States and even surpassed it in certain areas, setting off a cascade of “Sputnik” articles in the American press warning about the unassailable lead created by Soviet schooling, Soviet support for technology, and the prominence of engineers in the top Soviet leadership.

Yet in spite of its very substantial technological successes—with most U.S. and Soviet economists predicting that the USSR would overtake the United States technologically and economically at some point in the 1980s—this did not prevent the severe economic difficulties that emerged in the following decades. Soaring debt soon derailed the Soviet economy as the system struggled to absorb the costs of inefficient investment—before collapsing economically by the early 1980s.

Similarly, Brazil in the 1970s undertook a massive program of infrastructure investment, leaving it with some of the most advanced infrastructure in the developing world at the time. U.S. and European press at the time wrote approvingly about the trans-Amazonian highway, massive hydroelectric dams, and the ultra-modern urban expressways that united São Paulo, Rio de Janeiro, Brasília, and other major cities.

But by the late 1970s, it was becoming increasingly clear that much of this investment was not economically viable. Brazilian economic activity grew rapidly, but the debt funding that growth grew rapidly as real economic value creation failed to keep pace with reported GDP growth. And when external financing conditions tightened, Brazil was pushed into a debt crisis in the 1980s that required a painful adjustment that lasted well over a decade.

Japan offers perhaps the closest parallel to China. In the 1980s, as it struggled to boost domestic consumption, Japan invested heavily in infrastructure and technology, producing world-class industrial capabilities, the best infrastructure in the world, and narrowing the gap in technology with the United States, even surpassing it in several high-tech sectors. Its success was so complete that it had taken what was widely seen as an unassailable lead in many high-tech consumer products and was widely projected to overtake the United States, both technologically and economically, within two decades. The U.S. press at the time was replete with invidious stories comparing high-quality Japanese infrastructure and infrastructure-building processes with their more depressing U.S. counterparts, Japan’s technological superiority, the advantages of Japan’s rote-memory educational system, and its preference for engineers over lawyers.

But the same process was accompanied by a surge in debt and rising talk about “trains to nowhere.” Japanese infrastructure was indeed spectacular, as was its technological prowess, but it was also spectacularly expensive once subsidies and indirect expenses were included. When the system could no longer sustain this expansion, Japan entered a prolonged period of stagnation as it worked through the consequences of earlier excesses, that is, a process in which its share of global GDP dropped by more than two-thirds.

In all of these cases, the pattern is the same. High levels of investment lead to impressive real achievements, but if the investment is not economically justified, those achievements come at a cost—including a rising debt burden—that must eventually be repaid.

Two Sides of the Same Coin

China today fits squarely within this framework. Its infrastructure and technological advances are real and, in many cases, extraordinary. But they do not invalidate the argument that the country has overinvested. On the contrary, they are exactly what one would expect from an economy that has prioritized investment so heavily.

The real issue is not whether China’s investment has produced high-quality outputs—it clearly has—but whether the value created exceeds the cost. If it does, the model is sustainable. If it does not, China will eventually be forced into a difficult adjustment in which growth slows and the burden of past excesses is distributed across the economy.

Seen in this light, the two narratives—of a China bankrupting itself versus a China creating spectacular infrastructure and technological advance—are not contradictory at all. They may well be two sides of the same coin and describe different aspects of the same underlying reality: an economy that has achieved extraordinary gains through investment but that must ultimately confront whether the costs of that achievement were justified economically.