China overinvests. Europe underinvests. These look like opposite problems. They are two versions of the same failure.
The common problem is not capital scarcity. It is asset governance. The failure takes different forms, but in both cases, capital is allocated without a clear enough view of assets, returns and opportunity costs.
It matters because China’s investment model is no longer only a domestic issue. State-directed capital has helped generate excess capacity that spills into global markets, depresses prices and puts pressure on competitors abroad. The concern is becoming more acute: China’s record surplus in goods has revived fears of a second China shock, while renewed energy-price pressure could further sharpen its export advantage over parts of Europe and Asia.
The deeper issue is how capital is allocated – and how the assets created by that capital are governed.
The incomplete diagnosis of China’s investment
China’s economy is often described as suffering from too much investment, too little consumption and persistent supply-demand imbalances. The diagnosis is broadly right, but incomplete. China’s problem is not simply too much investment. It is also that a large share of investment takes place without the asset management disciplines: clear ownership, transparent valuation, explicit return expectations and accountability for performance.
Across China’s economy, a vast share of assets is publicly owned or controlled: state-owned enterprises, local government financing vehicles, state-directed banks, infrastructure platforms, urban real estate portfolios and companies held at different levels of government. These assets shape not only public finances, but also the allocation of capital across the economy.
Yet investment decisions are often driven less by expected returns than by fiscal targets, credit conditions, local revenue needs and administrative incentives. This is where China’s growth model creates its own bias. High gross domestic product growth targets require investment to keep rising even when productive opportunities are diminishing. Under hard-budget constraints, private firms will not usually commit capital to projects with weak expected returns. But sectors operating under soft-budget constraints – local governments, state enterprises, property platforms and state-supported manufacturers – can continue to invest because cheap credit, implicit guarantees and political incentives absorb the discipline that markets would otherwise impose.
The result is not merely high investment. It is a shift towards investment undertaken where budget constraints are softest and return discipline weakest. This model could be sustained for a long time because financial repression helped socialise the cost. Low returns to household savers made cheap capital available to state-directed borrowers, while the resulting investment delivered visible public goods, infrastructure and employment. But as returns decline, the question is what replaces the bargain: how future growth is financed, and what social contract exists between the public sector, that allocates capital and the households whose savings help fund it.
That matters because not all investment creates wealth. Infrastructure that relieves genuine bottlenecks can raise productivity. But duplicative infrastructure, excess housing or state-backed industrial capacity with weak returns can absorb capital without generating commensurate value.
Europe’s underinvestment problem
Over time, the economy gets more assets but not necessarily more wealth. Capital that could support private-sector growth is tied up in low-yield uses. Banks carry exposures to projects with unclear economic returns. Household income remains weak. Consumption struggles to rise. Excess capacity then spills into global markets and becomes a problem for everyone else.
Advanced economies have their own mirror image. Europe is the clearest case. It does not generally suffer from Chinese-style overinvestment. Its problem is often the opposite: underinvestment, weak maintenance and the underuse of assets governments already own.
Public land, buildings, infrastructure, utilities, transport assets, energy companies and state-owned enterprises are spread across ministries, agencies, municipalities and public companies. They are rarely governed as coherent portfolios.
The result is familiar. Governments know their debt in great detail, but often have only a partial view of their assets. They debate fiscal space while sitting on public wealth that is poorly mapped, poorly valued and poorly governed. They search for private capital while failing to turn public land, infrastructure, utilities and development rights into investable structures that pension funds, insurers and other long-term investors can finance. The result is not a shortage of capital, but a shortage of bankable opportunities.
This is why the mirror matters. In China, too much capital is mobilised without enough return discipline. In Europe, capital is available, but too few public assets are structured in ways that allow it to be deployed. One system produces excess capacity. The other produces thin project pipelines. Both reflect capital allocation driven by political and fiscal flows rather than professional asset governance.
Uncomfortable policy lesson for both sides
China does not need simply to invest less. It needs to impose stronger return discipline on the assets created by investment. That means clearer distinctions between policy assets and commercial assets, more transparent valuation, stronger governance of state enterprises and local investment vehicles and greater accountability for capital returns.
Advanced economies do not need simply to spend more. They need to make existing public assets visible, governable and investable. A government that owns land, infrastructure, enterprises and development rights but does not manage them as a portfolio is not capital constrained. It is institutionally constrained.
This distinction is especially important as Western governments try to respond to China’s industrial strength. Blocking imports or subsidising domestic production may buy time, but it does not by itself create productive investment capacity. That requires projects that are bankable, assets that are professionally governed and public partners that private capital can trust.
Governments are not merely tax-and-spend institutions. They are among the largest asset owners in their economies. Yet they rarely act like serious owners.
A serious owner knows what it owns, what those assets are worth, what returns they generate, what risks they carry and whether capital should be reinvested, restructured or redeployed. Most governments do this badly. China’s version of the failure is overinvestment without sufficient discipline. Europe’s version is underinvestment despite large public asset holdings. This is not an argument for privatisation. Public assets can remain public while being governed professionally. The issue is not ownership in itself, but whether ownership carries discipline.
Without that discipline, public capital is easily misallocated. In China, it can produce excess capacity, weak returns and pressure on the private sector. In advanced economies, it can produce decaying infrastructure, fiscal strain and chronic complaints about a lack of investable projects.
The West cannot answer China’s capital misallocation merely with tariffs, subsidies or industrial policy. It also has to fix its own public balance sheet.
China’s problem is capital without discipline. Europe’s is assets without structure. Much of the advanced world suffers from versions of the same failure.
 Dag Detter is Principal of Detter & Co.
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