Li Daokui: China's Economy Is Not K-Shaped Divergence, But Overall Cooling

Chinese economist Li Daokui recently stated in a speech that the biggest problem facing China's macroeconomy is not K-shaped divergence, but an overall cooling. This downturn has persisted for three years, primarily because local governments are using social funds to repay debts rather than creating new economic momentum.

According to reports from Caixin and the WeChat public account 'Research on Economic Transformation,' the 122nd China Macroeconomic Forum (CMF) held an online seminar on macroeconomic hotspots on the 11th. Li Daokui,院长 of the Institute for Chinese Economic Thought and Practice at Tsinghua University, delivered the keynote presentation.

He emphasized that the biggest issue is not K-shaped divergence, but overall economic cooling, which has lasted for three years. He stressed this point because 'K-shaped divergence' creates a false sense of hope—the 'upper line' cannot pull the entire economic base. A sense of crisis is essential.

He highlighted two particularly concerning data points: the broad unemployment rate and the severity of fixed-asset investment decline.

Based on data from China's National Bureau of Statistics, Li's team recalculated the broad unemployment rate by including individuals who have dropped out of the official labor force but still want jobs—what they term 'frustrated labor.' The resulting broad unemployment rate is currently 10.2%.

There are approximately 24 million long-term unemployed individuals, of whom 13 million are youth aged 16 to 24. This poses a serious threat to social stability.

The second indicator, fixed-asset investment, showed negative growth for all of 2025. In the first five months of 2026, cumulative investment declined by 4.1% year-on-year—an extremely rare occurrence in recorded statistics, with the intensity of the decline unprecedented.

Li stressed that these two issues must be taken seriously. If unresolved, all of China's economic goals and tasks will face significant difficulties.

Regarding the causes of economic cooling, he noted that new growth engines have not yet been established, while the old drivers—massive infrastructure investment and real estate—that powered China's economy for decades have now faded. Real estate and infrastructure investment have both 'burned out.'

However, he pointed out that much of the impact from the real estate downturn has already been absorbed by households. The core problem lies with local governments and local debt.

Households are unwilling to borrow for consumption; enterprises are reluctant to convert financial resources into investment. Yet social financing continues to grow, with large amounts of bank and bond market funds flowing to local governments. However, much of the money borrowed by local governments is 'revolving'—used for 'borrowing new to repay old'—creating a 'blockage' in the financial system.

Li advocates that the central government should issue more bonds. While the current plan is around RMB 12 trillion, he suggests it should be doubled or even more. The principle is that newly raised funds should be used to stabilize the real estate sector, invest in people, strengthen livelihood expenditures, and provide targeted consumption subsidies based on local characteristics. Through such measures, local governments could gain the capacity to support economic transformation and foster new profit-generating growth points.