March 3, 2026 (InvestinChina.asia) – In a detailed critique of prevailing economic narratives, prominent Chinese economist Yu Yongding has challenged several foundational assumptions guiding policy discussions, arguing for a significant, centrally-funded ramp-up in infrastructure investment to combat deflationary pressures and secure growth.
Speaking at the “Chang’an Forum,” Yu, a former adviser to China’s central bank and a member of the China Economists 50 Forum, systematically deconstructed what he termed conceptual and logical errors in the current macroeconomic debate. His central thesis is that China retains substantial fiscal space and unmet infrastructure needs, making increased government borrowing not only feasible but necessary to achieve its growth targets.
Myth-Busting: From “Consumption-Driven” Growth to “Capacity Overhang”
Yu took aim at the popular call for a shift from an “investment-driven” to a “consumption-driven” growth model. “There is no such thing as a ‘consumption-driven’ growth model in reality,” Yu asserted. Drawing on classical growth theory, he argued that long-term expansion is fundamentally driven by capital accumulation, labor, and technological progress—all fueled by savings and investment. Consumption, he contended, only “drives” growth in the short term when it helps to fill a gap in insufficient aggregate demand, allowing the economy to reach its productive potential.
Similarly, he dismissed the notion that “overcapacity” is a macroeconomic problem requiring broad demand-suppression policies. He argued that overcapacity is a sectoral, structural issue best resolved by market competition, industrial policy, and environmental regulations. The proper macroeconomic focus, he said, should be on the immediate imbalance between aggregate supply and demand. With China facing deflationary pressures (aggregate demand小于aggregate supply), the correct policy response is expansionary, not contractionary.
The Case for Infrastructure: “Far From Saturated”
The core of Yu’s argument is a robust defense of infrastructure investment. He directly challenged two common criticisms: that China’s infrastructure is already saturated and that such investments are inefficient.
“China’s infrastructure is far from saturated,” Yu stated, providing examples from transportation to urban utilities. He highlighted the vast gap with developed nations in areas like small airports and underground pipe networks, and pointed to massive potential in sectors like cross-regional ultra-high-voltage power lines for renewable energy and urban drainage systems, which he said could require 4.5 trillion yuan in investment alone.
On efficiency, Yu acknowledged past issues with waste but argued for a broader view of social returns. Using high-speed rail as an example, he noted that while some lines may not be commercially profitable, they have transformed the national economy. The key, he said, is to apply strict new standards—referencing the central government’s “Negative List” for local government special bonds—to ensure new projects are sound, rather than forgoing investment altogether.
The Fiscal Imperative: Central Government Must Lead
Yu identified the current funding model as a critical flaw. He presented data showing that central government contributions to infrastructure financing have dwindled to almost negligible levels, placing the burden and associated debt risks overwhelmingly on local governments. This, combined with strict debt ratio ceilings for localities, has severely constrained investment.
His solution is a major recalibration of fiscal responsibility. “The key is the sustainability of public finance, not a balanced budget,” Yu argued, distinguishing central government finance from household or local government budgets. He criticized the dogmatic adherence to a 3% deficit-to-GDP ratio—a rule of thumb from the EU with little theoretical basis for China.
With China’s inflation low and the yield on its 10-year government bonds around 1.7%, Yu sees ample market confidence and fiscal space. “China’s public finances are completely sustainable,” he concluded. He called for the central government to “significantly increase the intensity of expansionary fiscal policy, raise the deficit ratio, and issue more government bonds—especially long-term bonds—to fund infrastructure investment.”
His warning was clear: acting decisively now to boost demand is the best way to secure the 5% growth target. Excessive caution risks letting the window for stimulus close, especially if an external shock like an energy crisis were to reignite inflation and force a policy reversal later under more difficult circumstances.
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