4/15 If Chinese consumption levels were truly "normal", than one or both of two other things must be true: either Chinese investment is "normal", or if it is higher than normal, China must be running a trade deficit. After all, Net exports = GDP - Consumption - Investment.
5/15 In fact China has the highest investment share in history as well as the highest trade surplus in history. There are only two ways this can happen. One way, of course, is for Chinese consumption to comprise a very low share of GDP.
6/15 But there is another way, to which Kim refers in his essay. It may be real GDP is much lower than reported GDP. If it is true that a significant share of investment is wasted, but that this waste isn't accounted for in the GDP data, mainly because investment losses...
7/15 are capitalized rather than expensed, this means, among other things, that GDP growth has been systematically overstated every year by the amount of capitalized investment losses, as I explain in a recent essay. carnegieendowment.org/posts/2025/0...
8/15 Kim notes that this is one obvious way to resolve the "underconsumption" problem: "Chinese underconsumption is possibly the product of undercounting consumption and overestimating GDP." Yes, except that consumption is only undercounted to the extent GDP is overstated. It's the same thing.
9/15 To put this in simpler terms, there are two very different ways in which we can express China's demand imbalance, but these are just different ways of expressing the same problem of excess capacity—and require the same set of solutions.
10/15 One one hand, if China's reported GDP is an accurate measure of the value of goods and services produced by the Chinese economy (i.e. comparable to other economies' GDP), then it is true that the Chinese consume far too little of what they produce. This is just arithmetic.
11/15 If, on the other hand, Chinese consumption is "normal" in real terms, then either China is running a huge trade deficit (it clearly isn't), or the value of Chinese investment must be overstated, which in turn means that China's GDP is overstated.
12/15 Those who argue that China's real consumption is in fact "normal", and that this shows that China doesn't have a rebalancing problem, miss the point. China's consumption is only "normal" if China's GDP has been overstated by unrecognized overinvestment.
13/15 If you don't want to call this "underconsumption", that's fine, but then you have to call it "overinvestment". In either case it leads to excess capacity, whether that excess capacity shows up in investment in property, infrastructure or manufacturing (or all three).
14/15 More importantly, what the Chinese economy must do, whether you call it underconsumption or overinvestment, is the same. If it cannot get consumption growth to rise, it must reduce the growth in production, i.e. GDP, until the two are in balance.