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China’s growth trap—too much building, too little spending, weak firms that won’t die

Crowded trains during China's Golden Week indicate a desire for mobility, yet empty cash registers suggest economic insecurity. Regardless of Beijing’s response, India is positioned to benefit.

This week, China is on holiday as Golden Week coincides with the Mid-Autumn Festival, resulting in a 13-day break. Hotel bookings for stays of a week or longer have more than doubled compared with the previous year. Meanwhile, Beijing has launched a month-long campaign to encourage holidaymakers to spend more. But the underlying statistics tell a more cautious story: during last year’s Golden Week, average spending per trip fell to a three-year low of about 911 yuan. Although the Chinese are travelling, they are not spending as much. And it’s becoming a big problem in the world’s second-largest economy.

This expenditure gap is also the focus of the International Monetary Fund’s recent publication, Toward a New Economic Growth Model for China, edited by Thomas Helbling, Sonali Jain-Chandra, Siddharth Kothari, and Krishna Srinivasan. The book’s eleven chapters address topics ranging from household savings to bankruptcy law. Together, they examine an economy that has undergone one of history’s most dramatic transformations but is now creaking under three key issues: local governments that keep building despite diminishing returns, the survival of weak firms, and households’ reluctance to spend.

This situation is immediately relevant to India. A China that does not spend enough at home must rely more on exports. How Beijing addresses these three challenges will influence India’s trade, manufacturing sector, and position in Asia for the foreseeable future.

Also Read: Why India’s autorickshaws went electric before its family cars

A country that cannot stop building​

China’s economic achievement deserves acknowledgement. In 1978, its per capita income, measured in purchasing power terms, was approximately $900, less than 3 per cent of that of the United States. Over four decades, with an average growth rate nearing 9 per cent, the economy expanded nearly sixtyfold, facilitating the migration of more than 750 million people to cities.

But the Chinese model is now showing its limits.

In 1956, Robert Solow demonstrated that perpetual economic growth cannot be sustained solely through capital accumulation, as each successive addition of machinery or infrastructure yields diminishing returns. Paul Krugman’s 1994 essay, “The Myth of Asia’s Miracle,” also cautioned that growth driven by sheer effort rather than innovation eventually loses momentum.

A particularly striking chart from the International Monetary Fund would have intrigued Robert Lucas, who in 1990 questioned why capital does not migrate from affluent nations to poorer ones, where it should theoretically yield higher returns. China’s........

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