Having emerged from the “shortage economy”, the Chinese population has an inherent understanding of it. However, many have difficulty grasping the concept of “surplus economy”. China’s entire policy system, from individual actions to institutional frameworks, reforms to public awareness, and capital to market, has been familiar with and able to tackle the complexities of a shortage economy. Yet, it faces significant difficulties in handling the “surplus economy”. Even as China has entered the era of “surplus economy”, there remains a tendency to revert to the mindset and structures of “shortage economy”. As a result, progress often feels sluggish, marked by self-doubt, self-imposed limitations, and stagnation, rather than meaningful forward movement.
A “shortage economy” refers to a system in which the supply of goods and services is insufficient to meet demand, leading to widespread scarcity, inefficiency, the emergence of black markets, and phenomena such as rationing and long queues. The term was first introduced by Hungarian economist János Kornai in his analysis of planned economies. In China, the older generation is particularly familiar with this system, having lived through the era of food, meat, rice, and noodle rationing. In fact, records still exist online of documents dated from the 1970s, of the then Premier of the State Council approving individuals to purchase color televisions.
Having spent a long time in a shortage economy, people, when presented with opportunities to change their fate, can unleash immense energy. The drive to pursue wealth and meet needs infuses those emerging from a shortage economy with remarkable motivation. Therefore, transitioning from a shortage economy to a productive society, focusing on production and labor, and chasing large-scale manufacturing, where "more is never too much" and "bigger is never too big", facilitates a period of rapid economic growth. This transition is relatively straightforward. It is precisely this backdrop that enabled China to become the "world's factory", leading to widespread wealth accumulation, the rapid construction of high-rise buildings, and the emergence of the capital and strength that marked the rise of China.
The path China has taken is being closely watched by countries around the world, as it is not an impossible road to replicate. As a result, more and more nations are following suit, even striving to do so more vigorously. Driven by globalization, the outcomes are almost identical. The number of countries focused on "boosting production" and "pursuing growth" continues to rise, with nations like Vietnam, India, and others in Southeast Asia undergoing rapid transformations and experiencing periods of high-speed growth. Of course, another important development has also emerged: as more countries focus on production, a global surplus of supply and overproduction has occurred. The world has entered a buyer’s market phase, where the consumer holds the power. Buyers, as the dominant party, often feel they have the "right" to impose sanctions. This phenomenon is an inevitable result of the transition from a “shortage economy” to a “surplus economy”.
A surplus economy typically refers to a situation where production capacity exceeds market demand, resulting in an oversupply of goods or services. This phenomenon is often referred to in economics as “overcapacity” or “overproduction”. A surplus economy has several defining characteristics, such as supply exceeding demand, where the quantity of goods or services produced surpasses consumers' purchasing power or willingness, leading to inventory buildup or price declines. Another feature is resource wastage, where surplus production capacity, such as that of factories or equipment, remains idle, unable to fully realize its economic potential. Additionally, the economic pressure increases, with corporate profits declining, which may trigger layoffs, debt defaults, or even bankruptcies, thereby affecting the overall economy.
Some government actions or policies, though intended to stimulate economic growth and with the initial goal of boosting growth, may, in practice, intensify the “surplus economy”, adding to its severity.
For example, many have proposed the so-called “policy-driven” approach, continuing to inject substantial resources into specific sectors. However, a surplus economy can often be a direct result or aggravation of excessive government investment or subsidies in particular industries. Another example is the investment-driven model. China’s economy has long depended on infrastructure construction and industrial investment, while domestic demand has been relatively sluggish, leading to a serious disconnect between production and consumption. Taking the photovoltaic industry as an example, due to misguided policies, the industry has expanded rapidly in recent years, and China has quickly become the world’s largest producer of solar panels. However, the country’s domestic demand cannot fully absorb the supply, forcing the industry to rely heavily on exports, which in turn sparks international trade tensions. Similarly, the electric vehicle industry has rapidly developed under government subsidies and policy incentives, but intensified market competition has led to significant losses for many companies.
On one hand, the rational demand for economic development calls for "capacity reduction", but on the other hand, "real-world interference" calls for increased investment. This contradictory phenomenon is, by now, widespread. Therefore, the key issue is when China will be able to free itself from this contradiction, which ultimately depends on its understanding and recognition of the “surplus economy”.
In fact, even before I began researching the Belt and Road Initiative (BRI) in 2008, I had already clearly realized how forceful the "surplus economy" could be. During the shortage economy, it was easy to scale up and grow; simply finding resources and investing sufficiently could achieve that. After all, a shortage economy is fundamentally a resource issue. However, the problem lies in the fact that while scaling up is easy and growth can be rapid, what happens once the scale has been expanded so large? What if that vast scale can no longer be sustained? Even if resources were abundant, there would inevitably come a day when these resources run out. Take the United States, for example. The highway network, roads, bridges, and railways built in the 1890s are now rusted and deteriorating, with concrete and steel crumbling. Today, restoring and upgrading these infrastructures requires investments many times greater than what was needed in the past. Where will such funds come from in the future to rebuild? The only option will be to make do with ruins, patchwork repairs, and temporary fixes. This is the danger of scale. It is also the reason I pointed out the risks of surplus economy and why the BRI was proposed, i.e., to dilute excess capacity globally and promote the idea of "going out".
Sooner or later, we must acknowledge that the transition from a “shortage economy” to a “surplus economy” involves distinct ways of living, each suited to its respective circumstances. There are ways of living in times of scarcity, and there are ways of living in times of abundance; both are fundamentally different. The transformation from a poor nation to a wealthy one is a complex process. This transformation is extremely challenging, not something that can be achieved overnight, and certainly not as simple or easy as textbooks in economics often suggest.
To overcome the “surplus economy,” the issue is not simply about encouraging consumption, but rather about driving consumption upgrading, and this means transformation. However, the outcome of this is that in China today, even luxury brand stores from abroad are being pushed out. Many believe that with the rise of e-commerce, everything has been solved, and some even regard e-commerce as a form of upgrading. In reality, it has resulted in nothing more than low-level repetition, further exacerbating surplus on top of surplus.
Overcoming the "surplus economy" and "capacity reduction" is an inevitable measure. Simply put, this crucial step is "going global", a strategy proven by the experiences of Japan’s industries and enterprises. However, China’s "going global" strategy has encountered significant issues. The BRI has turned into a resource competition, with private enterprises unable to compete with state-owned enterprises. Capable players are sidelined, while state-owned enterprises, lacking efficiency, focus primarily on policy-driven resources. As a result, many BRI projects have stagnated. Fortunately, it now seems that the private sector, which has been the main driving force, is starting to catch up and is taking steps forward.
To overcome the "surplus economy", urban renewal offers an option based on experience, and most countries have adopted this approach. However, urban renewal should be "people-oriented" rather than merely expanding urban spaces. Even in first-tier cities like Shanghai, a glance at the so-called "urban renewal plans" reveals that they still reflect an urban space design where people are treated as mere embellishments. In the realm of urban development, what is even more crucial at this time is ordered de-urbanization. We must acknowledge the rationality of de-urbanization, reviving rural areas while compressing urban space and reducing operational costs. This too is a balanced approach to overcoming the "surplus economy". That being said, not many truly understand this concept.
As for the capital markets, looking around the world, almost all of the countries that have successfully transitioned from poverty to wealth have well-developed and prosperous financial markets. In contrast, China’s financial market is disorderly. This type of capital market is still far from achieving a successful transformation, or more accurately, still far from even aspiring to succeed in the transformation.
However, the issues and contradictions mentioned above are relatively easier to resolve during the transition from a “shortage economy” to a “surplus economy”. The truly difficult challenge lies in the social environment, i.e., the understanding, recognition, and consensus at the societal level. The real obstacle is pushing the entire society to move forward, and this is incredibly difficult.
In the era of the “surplus economy,” almost all opportunities to move upward have been filled. Making the majority of Chinese people understand that stories of sudden wealth are nothing more than fantasies is crucial. The ideal state is a sustained and stable "low-level, steady increase in income." Chinese people need to realize that an income level surpassing the inflation rate is already quite good. This is also why inflation indicators remain extremely important in the “surplus economy” era. Because, in essence, it is not about prices, but about income levels.
In the "surplus economy" era, the Chinese must be mentally prepared to endure a 3% to 4% economic growth rate for a long time. A 5% economic growth would be a cause for celebration. In a consumption-driven "surplus economy", consumption is relatively inelastic. Families know how much they can consume based on their size. Essentially this era, the economy will hardly achieve the high growth rates characteristic of a production-oriented society focused on manufacturing. Whether society can adapt to this era depends on whether its governance structure can match and accommodate this shift. In other words, it is not just a matter of the public needing to adapt, but government departments also facing their own adaptation challenges.
In the "surplus economy" era, institutional development is unavoidable. The transition from a “shortage economy” to a “surplus economy” will inevitably be reflected in institutional changes. As such, this period must be one of large-scale institutional development. In the past, problems that were solved by simple and crude financial means must now return to the core issue and be replaced by acceptable, rational, stable, and comprehensive institutional solutions.
The greatest challenge in the "surplus economy" era is the large-scale transformation of society and culture. The shift from a crude, money-oriented mentality to a more refined and progressive modern civilization is an essential part of the process of transitioning from poverty to wealth. However, this path is especially difficult due to the unique characteristics of China's urban-rural population distribution, and it is a challenge that must be faced. If the transformation from a “shortage economy” to a “surplus economy” occurs without corresponding ideological and consciousness shifts, societal turmoil is inevitable.
Therefore, overall, the transition from a "shortage economy" to a "surplus economy" is a societal transformation of a large system, far beyond simply "increasing consumption". It is an extremely complex process. While the transition from poverty to wealth is difficult, getting wealthy is not necessarily easy, and in fact, may be even harder. This will undoubtedly require time, but more importantly, it requires the right direction. China will need to look ahead to the economic and social environment that awaits, in order to successfully achieve the transformation.
Final analysis conclusion:
The transition from a “shortage economy” to a “surplus economy” is not only a change in production models but also a profound adjustment in social governance, institutional development, and cultural values. Faced with global overproduction and sluggish domestic demand growth, China must move away from the traditional large-scale investment-driven model and promote industrial upgrading, consumption upgrading, and urban renewal to address the structural challenges of the "surplus economy". The key to a successful transformation lies in establishing a reasonable and stable institutional framework, optimizing resource allocation, and reshaping societal culture to adapt to the deep-rooted changes in economic growth models.
