China aims to raise the real wages of its people through increasing labour productivity and lowering the cost

of living. This is achieved by investment and an organisation of resources that makes the whole greater than

the sum of its parts.

Infrastructure is at the core. Beginning on the east coast, China’s infrastructure has made it the pre-eminent

manufacturing economy in the world. Increasingly, infrastructure serves to lower living costs through urbanisation and distribution. In this way, it drives both increased consumption but also, importantly, increased levels of equality.

And by the power of networks, the more infrastructure China produces, the greater the benefit.

The challenge, of course, is delivering the right outcomes. Here China seems to understand that profit maximising at the firm level cannot lead to an optimal economy-wide outcome. In some instances, this means using natural monopolies for social rather than financial gain. In others, it means cross-subsidisation. While in others, it means producing some of the most competitive markets in the world, where excess returns are non-existent.

Failure is, in many ways, a feature rather than a bug. It represents both innovation and rejuvenation:

evident in high speed rail, ultra-high voltage and, for failure, the ghost cities. It will allow industries to rise

and, in turn, fall: the State Owned Enterprises (SOEs) in the late nineties, textiles and coal. Tomorrow it

may be trust products.

Yes, there are challenges: property and debt. But these fragilities are over-stated. They do not threaten

the model.

The proof is in the numbers. Not just headline growth, but stable and low inflation, strong wage growth and

rising tax revenue. The St Louis Federal Reserve estimate that the multiplier on Chinese government spending

is two. The economy is creating surplus capital to replace that which is destroyed. Finally, there are exports.

Exports validate internal data: China is taking global market share and prices are falling even as wages and

currency rise. What’s happening externally is surely happening internally.

Like the United States before it, the entry of China into the international economy has raised, in aggregate, living standards globally. The productivity improvement has made available to even more the benefits of manufactured technologies. But rather than being a Golden Goose, China is a deflationary force. A great destroyer of capital.

The challenge for the developed world is to harness this engine of productivity, not to work against it. It’s the

same for financial markets.

Simply, the largest population on earth, pursuing a radical investment in public goods with near perfectly

competitive goods markets was always going to change the world. It’s just a matter of how….Its approach to investment fits in the broad Asian model. There’s significant direction: the Chinese leadership believes that much of the decision making around certain investment, infrastructure for instance, should occur in the absence of a market. Yet, it uses the market in sectors where the market creates the best outcomes, such as consumer goods and services. In this way, China encourages a disaggregated economy with the shared, network investment these firms rely upon…This paper will argue that it is China’s investment approach that drives its economic stability. If there is going to be a transition to a higher level of relative consumption in the near future, this will be because investment, and investment alone, has made it so. To rebalance the economy in favor of consumption through a reversal of current policy would be a terrible mistake. It would exacerbate rising levels of inequality and foster the type of entrenched inflation that besets emerging markets. http://www.cfsgam.com.au/au/insto/Insights/How_investment_transformed_China/