Investment strategy prioritizing quality over quantity

A 7.2 percent decline in fixed-asset investment in the first three quarters of 2026 has reignited the debate over China's economic model.

One camp argues that investment-led growth has run out of steam: returns have diminished, debt has piled up, and a decline should be welcomed because it makes room for consumption-led growth. The other camp sees the end of the growth miracle, since investment powered decades of rapid expansion. However, both views miss the point. What matters is not simply how much China invests, but what it invests in, and that is changing fundamentally.

The headline figures conceal a sharp divergence. Investment in property development fell 20.6 percent, significantly dragging the total down. At the same time, investment in high-tech industries grew 4.9 percent while investment in intellectual property rose 9.3 percent. Within high-tech, investment in information services surged 20.2 percent year-on-year, aerospace equipment manufacturing climbed 12.5 percent, and electronic and communications equipment manufacturing rose 7.6 percent.

This indicates a shift in investment patterns rather than a uniform retreat across the economy. Property investment after the 2008 global financial crisis helped China avoid stagnation and markedly raised homeownership, but it also bred excessive leverage, falling returns and surplus housing supply. Since the introduction of the "three red lines" policy, credit has shifted from property toward industry.

Investment in high-tech industries grew at an average annual rate of 9.9 percent between 2021 and 2025, far outpacing overall investment. Such spending not only supports domestic demand but advances technological innovation and boosts productivity.

Contrary to some opinions, investment does not compete with consumption. Investment creates jobs and income, fueling household spending and saving. Promoting investment therefore supports consumption rather than hinders it.

On the supply side, investment in six networks — water, power grids, computing power, telecommunications, logistics and underground pipelines — lays the foundation for an economy integrated with artificial intelligence and resilient to climate change.

Investment in AI, green technologies, bio-tech and other high-tech industries creates new growth engines, promotes general productivity growth, and protects national security. In a nutshell, investment remains a strategic priority and will keep playing a critical role in China's transformation.

The challenge lies in sustaining investment growth while improving its quality. Project viability must be rigorously assessed, efficiency improved and debt prudently managed. Investment should flow not only to high-tech industry but also to services, especially public services and the infrastructure that supports service consumption, such as health care, education, tourism, sports and entertainment.

Service consumption grew five times as fast as goods consumption in the first nine months of 2026, yet investment in services still lags. Closing that gap promises solid returns and would further stimulate service consumption.

Sufficient and secure financing is equally important. Policy banks, large commercial banks and state-guided investment funds should continue to provide long-term, patient capital for infrastructure and high-tech projects that take time to bear fruit.

Equity financing is playing a growing role for tech start-ups: announced equity investment in China's AI sector reached 282 billion yuan ($42 billion) by Aug 21 this year. As China deepens its equity markets and streamlines initial public offerings for tech companies, this channel will only become more important.

Bonds and foreign capital add further depth to financial resources.

Special treasury bonds remain a key source of infrastructure funding, while corporate bond issuance, both onshore and offshore, has grown rapidly, supported by low yields on yuan bonds and a stable currency. Tencent Holdings, for instance, recently raised $5.7 billion through dollar and offshore yuan bonds to bankroll its AI initiatives.

Foreign direct investment in China's high-tech sector reached 200.26 billion yuan in the first eight months of 2026, up 35.1 percent year-on-year, and accounted for 41.7 percent of FDI inflows.

Drawing on a variety of financial resources, including bank credit, stocks and bonds, State funds, venture capital, private equity and foreign funds helps diversify risk and scale up financing.

While Western academics and media may lament or celebrate the decline in investment in China, they overlook the qualitative shift now under way. Investment remains a critical engine of growth, both by boosting demand and by driving innovation and industrial upgrading. Policymakers should continue to steer capital toward the right sectors, and keep developing the financial system to support investment while managing risks.

The author is the Kremer Chair professor of economics at Willamette University and a nonresident senior fellow at the Global Development Policy Center at Boston University.

The views don't necessarily reflect those of China Daily.

If you have a specific expertise, or would like to share your thought about our stories, then send us your writings at opinion@chinadaily.com.cn, and comment@chinadaily.com.cn.