In brief, Yu’s story is that growth has been sustained temporarily, but at the cost of economic balance. Investment fever and strong external demand from mid-2007 meant China’s inflation rate worsened rapidly. The strong external demand delayed the surfacing of overcapacity for many years. But export demand could not sustain the high rate of investment forever. In the second half of 2008, export demand collapsed in the global financial crisis. Long-postponed overcapacity surfaced suddenly. The sudden shift from inflation to deflation, in September to October 2008 was one remarkable outcome of this change. The Chinese government moved quickly to mitigate falling GDP growth after the GFC through a stimulus package and monetary expansion and its success, says Yu and others, is unsurprising. If the government fails to tackle structural problems head on, however, the negative impact of the measures taken to manage the crisis could be serious in the medium to longer term, and end in the collapse of China’s high growth rate model.

The key question, of course, is whether high levels of investment are spent well and generate sustainable returns. The alternative argument is that investment return was rising, not falling, before the crisis. Returns on investment have probably fallen through the big increase in government expenditure during the crisis, as could be expected because of the scale and speed of what’s been done through the public sector, however effective that has been in restoring demand. Yu certainly provides plenty of evidence of that, especially at the local government level. This can in principle be corrected as investment is adjusted downward, and as consumption rises, as Yu himself suggests. But the structural problems both in the public sector and in the market economy are now a top priority for Chinese policy leaders. Yu says policymakers understand this priority. But others are not so sure.