I think the key point you're leaving out is "The core issue is that fragmented decision-making by rational economic actors" in the presence of massively, systemically suppressed capital costs for so-called advanced manufacturing industries.
The later point that this process lowers global cost of energy transition ignores that the price is paid households in both China and globally, as well as the geopolitical risks of having so much manufacturing concentrated in one nation-state
I find the idea that capital costs are "systematically supressed" to be a problematic one. It presumes there's some "natural" cost of capital that governments, industries, and financial institutions must all abide by, like it's written in a textbook somewhere - or that the rate that a "free capital market" would have determined to be acceptable is certainly the correct one. China is not a capitalist state, and so capital is not priced in a manner that is maximally rewarding for the owner of the capital - but rather in a way that is maximally useful for the state to acheive its objectives. That is, it's a tool to achieve an end, not the end in and of itself. The objectives of the state and the objectives of capital owners are often at odds and it's not at all convincing to me that prioritizing the objectives of capital owners would result in better outcomes for China's well-being.
Because the success (or lack thereof) of the energy transition is indeed not just a matter of convenience, but an existential threat for many humans on this plant (for instance, Pacific island nations) it seems to me like a perfectly worthwhile thing to prioritize the needs of the energy transition (and it's speed) over a great many other things...perhaps most things even. I don't extend this argument to steel or aluminum or other sectors in which Chinese overcapacity may impact global markets. This is a cleantech thing specifically.
Finally, in China, injection of capital into the manufacturing sector results in wage transfers to the households sector - at least as long as manufacturing needs human labor (granted, this isn't always a sure thing, but it still is for now at least). Seeing as household incomes have been rising consistently over the last 15 years (well above the inflation rate of all goods except housing) it looks like Chinese households are indeed significant beneficiaries of manufacturing expansion, state-backed or otherwise. The idea that they wouldn't be, or that state backing for manufacturing "crowds out" other types of support for households, while a trendy idea in some parts of the China economic commentary world, is not a robustly supported one.
Well-written post added to a well-written article. I struggle to understand the highly regulated (and subsidized) US electricity market, so the odds of my forming well-informed opinions on China are negligible. For that reason, I'm inclined to be forgiving of the author of the article being criticized.
That said, it might be possible if the suppression in capital markets was less pronounced in China. I could identify the subsidies and form reasonable opinions on costs in the US if I put a reasonable amount of effort into it, but in China, it is impossible.
The idea that capital carries a price reflecting risk and scarcity is literally in every economics and finance textbook. Cheap capital can be useful in a catch-up phase for infrastructure and basic industries, but at the innovation frontier it breaks efficiency. And in China the main owners of capital are the state and households so when returns are suppressed, it isn’t some abstract “capital class” that loses out, but household savers.
I don’t really believe that the energy transition will be effected by a Chinese solar industry that netted a loss of US$60 billion dollars in 2024 … it will take effective utilization of capital towards frontier technologies. And maybe by a western working/middle class whose political commitment to low-carbon transition isn’t hollowed out alongside their own industrial base.
Your third point is gibberish. The manufacturing percent of employment is minority of employment and wages (especially among skilled workers) compared to service sector are lower. Household wage gains in China result from urbanization, productivity, and services NOT manufacturing wage transfers.
1. I'm not disputing that the market can choose a cost for capital, as written in the textbooks - just disputing that it's the correct cost for the needs of the economy at a given moment, or that any economic system should follow it just because its what the market wants. China is a real economy, not the one described in an econ textbook, or written about by accounting identity-obsessed pundits. Something like 350m people fit the World Bank definition of "high income" while another 750m are "upper middle income", 200m are "low middle income" and as many as 100m are still "low income". Hundreds of millions of people are in the catch-up phase, while having no market power. Most household capital is in real estate, but there are still 100s of millions of people waiting to buy their first urban home. For quite a while, the market played the largest role in determining the rate of return households got on their capital in the real estate sector, which ensured it would get increasingly impossible for those who didn't have real estate yet to buy any. The suppressed household capital returns of which you speak are also the mechanism by which many households may finally have a chance to buy their first urban homes.
2. Weird how that industry that lost 60B also managed to build 100s of GW of solar and export 100s more. There's virtually no other cleantech industry in the world that's using debt and capital more effectively in pursuit of an energy transition. You wanna obsess with the efficiency of the capital use and its generated return - fine, go chase your ROI in some Silicon Valley startup. The Chinese state itself underwrites the energy transition for the moment. Solar and wind and batteries and EVs are the techs today - next it'll be next-gen nuclear and industrial electrification/introduction of green hydrogen and maybe CCS someday, who knows. All of that will be done at low margins or losses for long periods of time, underwritten by the Chinese state. China is quite comfortable using both fiscal and monetary policies in this way. They have no aversion having the PBOC print money to bail out and backstop their industrial sectors until hell freezes over, as long as inflation stays in check. Which, for now, it clearly is. You can fret about potential losses in innovation potential but that's also not happening yet...
3. Manufacturing is still 30% of the workforce...230 million people. My previous comment overstated the overall role that manufacturing wage growth would have played in overall wage growth, and I'm willing to acknowledge that, but your final statement that manufacturing wage transfers are not a driver is obviously also not correct. Manufacturing wages in 2025 are 2.5x higher than manufacturing wages in 2010 - enabled by investment into the manufacturing sector. I maintain the contention that Chinese households are indeed significant beneficiaries of manufacturing expansion, and also that state support for manufacturing does not crowd out other types of investment.
Brilliant article. Appreciate the repost very much. What amazingly lame losers these people are. What a pathetic bunch of weak cry-babies. lol
As if the US didn't have it's own "involutionary" process of railroad company consolidation back in the Gilded Age.
Just pathetic. So much that is it not almost needless to refute? Just let them badmouth China to their own information bubbles while their "garden" descends into chaos. What better way to move on from their nonsense? It's not like rationally arguing with people who are either so biased or dumb is likely to achieve much more than wasting one's time and energy, is it?
Obviously US bubble investment in railroads or digital networks didn't have negative externalities on other countries (just as China's overspend on 高铁 doesn't affect other countries)
With all due respect, yes it did, and yes it does.
That does not mean that indeed back the negative externalities were of the same magnitude as those today involving the key sectors in which China has such extensive capacity and in which it has begun to accumulate some losses given the need to adjust to the ongoing global economic slowdown.
However, you'll also see in a comment of mine below that I also criticised the fact that China's economy does seem like it needs some significant rebalancing.
Hey, this helps those neutral observers like the rest of us, interested in how China is truly moving doing and moving forward - without the overly negative or positive paint brushes. Leads to our understanding of opportunities better, so thanks to the authors. :)
2 - Does he not actually have somewhat of a point in his argument that there's the need to liberalise RMB trading more, as a key underlying pillar of so many consequent economic interconnected mechanisms, namely allowing for better, natural balancing of supply and demand (though not in an entirely free, "Western-style" manner, of course)?
I think the key point you're leaving out is "The core issue is that fragmented decision-making by rational economic actors" in the presence of massively, systemically suppressed capital costs for so-called advanced manufacturing industries.
The later point that this process lowers global cost of energy transition ignores that the price is paid households in both China and globally, as well as the geopolitical risks of having so much manufacturing concentrated in one nation-state
Interesting article though
I find the idea that capital costs are "systematically supressed" to be a problematic one. It presumes there's some "natural" cost of capital that governments, industries, and financial institutions must all abide by, like it's written in a textbook somewhere - or that the rate that a "free capital market" would have determined to be acceptable is certainly the correct one. China is not a capitalist state, and so capital is not priced in a manner that is maximally rewarding for the owner of the capital - but rather in a way that is maximally useful for the state to acheive its objectives. That is, it's a tool to achieve an end, not the end in and of itself. The objectives of the state and the objectives of capital owners are often at odds and it's not at all convincing to me that prioritizing the objectives of capital owners would result in better outcomes for China's well-being.
Because the success (or lack thereof) of the energy transition is indeed not just a matter of convenience, but an existential threat for many humans on this plant (for instance, Pacific island nations) it seems to me like a perfectly worthwhile thing to prioritize the needs of the energy transition (and it's speed) over a great many other things...perhaps most things even. I don't extend this argument to steel or aluminum or other sectors in which Chinese overcapacity may impact global markets. This is a cleantech thing specifically.
Finally, in China, injection of capital into the manufacturing sector results in wage transfers to the households sector - at least as long as manufacturing needs human labor (granted, this isn't always a sure thing, but it still is for now at least). Seeing as household incomes have been rising consistently over the last 15 years (well above the inflation rate of all goods except housing) it looks like Chinese households are indeed significant beneficiaries of manufacturing expansion, state-backed or otherwise. The idea that they wouldn't be, or that state backing for manufacturing "crowds out" other types of support for households, while a trendy idea in some parts of the China economic commentary world, is not a robustly supported one.
Well-written post added to a well-written article. I struggle to understand the highly regulated (and subsidized) US electricity market, so the odds of my forming well-informed opinions on China are negligible. For that reason, I'm inclined to be forgiving of the author of the article being criticized.
That said, it might be possible if the suppression in capital markets was less pronounced in China. I could identify the subsidies and form reasonable opinions on costs in the US if I put a reasonable amount of effort into it, but in China, it is impossible.
The idea that capital carries a price reflecting risk and scarcity is literally in every economics and finance textbook. Cheap capital can be useful in a catch-up phase for infrastructure and basic industries, but at the innovation frontier it breaks efficiency. And in China the main owners of capital are the state and households so when returns are suppressed, it isn’t some abstract “capital class” that loses out, but household savers.
I don’t really believe that the energy transition will be effected by a Chinese solar industry that netted a loss of US$60 billion dollars in 2024 … it will take effective utilization of capital towards frontier technologies. And maybe by a western working/middle class whose political commitment to low-carbon transition isn’t hollowed out alongside their own industrial base.
Your third point is gibberish. The manufacturing percent of employment is minority of employment and wages (especially among skilled workers) compared to service sector are lower. Household wage gains in China result from urbanization, productivity, and services NOT manufacturing wage transfers.
1. I'm not disputing that the market can choose a cost for capital, as written in the textbooks - just disputing that it's the correct cost for the needs of the economy at a given moment, or that any economic system should follow it just because its what the market wants. China is a real economy, not the one described in an econ textbook, or written about by accounting identity-obsessed pundits. Something like 350m people fit the World Bank definition of "high income" while another 750m are "upper middle income", 200m are "low middle income" and as many as 100m are still "low income". Hundreds of millions of people are in the catch-up phase, while having no market power. Most household capital is in real estate, but there are still 100s of millions of people waiting to buy their first urban home. For quite a while, the market played the largest role in determining the rate of return households got on their capital in the real estate sector, which ensured it would get increasingly impossible for those who didn't have real estate yet to buy any. The suppressed household capital returns of which you speak are also the mechanism by which many households may finally have a chance to buy their first urban homes.
2. Weird how that industry that lost 60B also managed to build 100s of GW of solar and export 100s more. There's virtually no other cleantech industry in the world that's using debt and capital more effectively in pursuit of an energy transition. You wanna obsess with the efficiency of the capital use and its generated return - fine, go chase your ROI in some Silicon Valley startup. The Chinese state itself underwrites the energy transition for the moment. Solar and wind and batteries and EVs are the techs today - next it'll be next-gen nuclear and industrial electrification/introduction of green hydrogen and maybe CCS someday, who knows. All of that will be done at low margins or losses for long periods of time, underwritten by the Chinese state. China is quite comfortable using both fiscal and monetary policies in this way. They have no aversion having the PBOC print money to bail out and backstop their industrial sectors until hell freezes over, as long as inflation stays in check. Which, for now, it clearly is. You can fret about potential losses in innovation potential but that's also not happening yet...
3. Manufacturing is still 30% of the workforce...230 million people. My previous comment overstated the overall role that manufacturing wage growth would have played in overall wage growth, and I'm willing to acknowledge that, but your final statement that manufacturing wage transfers are not a driver is obviously also not correct. Manufacturing wages in 2025 are 2.5x higher than manufacturing wages in 2010 - enabled by investment into the manufacturing sector. I maintain the contention that Chinese households are indeed significant beneficiaries of manufacturing expansion, and also that state support for manufacturing does not crowd out other types of investment.
👍thanks!
Brilliant article. Appreciate the repost very much. What amazingly lame losers these people are. What a pathetic bunch of weak cry-babies. lol
As if the US didn't have it's own "involutionary" process of railroad company consolidation back in the Gilded Age.
Just pathetic. So much that is it not almost needless to refute? Just let them badmouth China to their own information bubbles while their "garden" descends into chaos. What better way to move on from their nonsense? It's not like rationally arguing with people who are either so biased or dumb is likely to achieve much more than wasting one's time and energy, is it?
Obviously US bubble investment in railroads or digital networks didn't have negative externalities on other countries (just as China's overspend on 高铁 doesn't affect other countries)
With all due respect, yes it did, and yes it does.
That does not mean that indeed back the negative externalities were of the same magnitude as those today involving the key sectors in which China has such extensive capacity and in which it has begun to accumulate some losses given the need to adjust to the ongoing global economic slowdown.
However, you'll also see in a comment of mine below that I also criticised the fact that China's economy does seem like it needs some significant rebalancing.
Hey, this helps those neutral observers like the rest of us, interested in how China is truly moving doing and moving forward - without the overly negative or positive paint brushes. Leads to our understanding of opportunities better, so thanks to the authors. :)
Now, the two big questions I have are:
1 - What is Zhongguó's leadership doing in tolerating Michael Pettis (whose perma-skepticism is well known: for example, here he was with his own article on involution just over a couple of weeks ago - https://carnegieendowment.org/posts/2025/08/whats-new-about-involution?lang=en; or here debating China's local government debt problem with Miss Alicia - https://www.bruegel.org/podcast/understanding-local-government-debt-china) teaching at one of its most prestigious Universities?
2 - Does he not actually have somewhat of a point in his argument that there's the need to liberalise RMB trading more, as a key underlying pillar of so many consequent economic interconnected mechanisms, namely allowing for better, natural balancing of supply and demand (though not in an entirely free, "Western-style" manner, of course)?
Best regards,
Rafael
Having in the meantime read https://www.eastisread.com/p/wu-xiaoqiu-says-only-the-rule-of, my second question was answered. Still, the first question remains.
Here is a good link to explain the conundrum of the dirty vs Green economy in China. https://carnegieendowment.org/posts/2025/09/how-chinas-growth-model-determines-its-climate-performance?lang=en