The formation of China's development model is a history of division — "E charging ahead alone": the 1994 tax-sharing reform centralized fiscal power, and local governments turned to land finance and investment-driven growth, sending economic value (E) soaring; but livelihoods and distribution (S) and debt sustainability (T) were deferred again and again — the faster the growth, the thicker the bill.
The remedy lies in a new connotation of money: let currency carry economic value, social value, and time value at once, transforming the "production-oriented government" into a "service-oriented government." When the three values are measured on one unified yardstick, the dividends of growth flow toward livelihoods and the future — a self-regulating virtuous cycle begins, and nation, enterprise, and individual all win.
One Formula to Understand It
E economic value (growth and investment) · S social value (livelihoods · distribution · environment) · T time value (debt sustainability · generations)
Only when all three exceed 1 together does growth become well-being; if any one is over-drawn, prosperity is discounted.
When government answers only to economic value E — land finance, investment-led stimulus, debt-financed projects —
S is deferred, T is over-drawn: growth shines in the short run, risk accumulates in the long run.
What This Book Is About
— Lan Xiaohuan · Inside the Game
Origin: In 2021, Lan Xiaohuan, a professor at Fudan University, published Inside the Game: The Chinese Government and Economic Development, tracing in one continuous story the tax-sharing reform, land finance, local competition, investment attraction, and debt and risk — a panorama of the "developmental state" in operation. His core judgment: the government's deep participation created the miracle of rapid industrialization and urbanization, and also left the examination questions of debt, overcapacity, and distribution.
His reminder: in judging this model, do not look at the growth rate of E alone; look also at the bills of S and T — whether the dividend has reached the people, and whether the engine can run to tomorrow.
How the Model Forms
Investment-Driven · E Charges Ahead Alone
Source of DivisionFormation: after the tax-sharing reform stripped fiscal power from localities, local governments pulled growth through the closed loop of "sell land — borrow — build infrastructure — attract investment," and economic value (E) multiplied rapidly — this was the engine of the miracle, and the origin of the habit.
Livelihoods Deferred · Distribution Unresolved
The Deferred TermFormation: resources tilted persistently toward investment and production, while education, health care, pensions and income distribution (S) were put off; high housing prices, weak domestic demand, and urban-rural gaps are the bill accumulated by "heavy investment, light livelihoods."
Debt Accumulating · The Future Over-Drawn
The Hidden CostFormation: land-based finance and LGFV debt propped up infrastructure, but pushed repayment pressure onto the future (T over-drawn); overcapacity and inflated asset prices are the time-difference bill of "exchanging tomorrow for today."
Three Acts of the Process Observed
Fiscal Power Centralized, Localities Turn to Land Finance
The reform greatly enlarged central fiscal power while local revenues shrank — and "making money by selling land" stepped onto the stage.
The 1994 tax-sharing reform assigned the largest shares of VAT and income tax to the center, stripping away local fiscal power (a relative E); localities therefore turned to land-transfer fees and land-collateral borrowing, making land finance the new engine (E enlarged again) — it supported urbanization, and also made "growth — sell land — grow again" a path dependency, with the bills of S and T growing ever thicker.
Fiscal arrangements must make incentives compatible: authority matched to funding (E), assessment including livelihoods and environment (S), land finance shifting toward public services (T) — so that localities are willing to keep the long-term ledger.
The Industrialization Miracle of the Tournament — and Overcapacity
Localities "competed for growth," and industry scaled up rapidly — sowing the seeds of duplicate construction.
In the "promotion tournament," local officials raced to attract investment, subsidize, and launch projects, achieving leapfrog growth in industrialization and infrastructure (E); but everywhere rushed in at once, creating overcapacity in solar, steel, and autos (waste of S), and when subsidies withdrew, all was left in disarray — competition built scale while overdrawing efficiency and resources (T).
Competition needs rules, and division of labor belongs to the market: let the market have the final word on capacity (S), shift assessment from "comparing growth" to "comparing quality" (E), and let industrial policy serve innovation rather than scale (T).
Borrowed Prosperity: From LGFVs to Risk Resolution
Land collateral plus LGFV borrowing — infrastructure "built today, repaid tomorrow": time begins to settle the account.
LGFVs borrowed against land to finance infrastructure, pushing the urban landscape (E) to a new level in the short run; but debt swelled steadily, repayment pressure and financial risk (T over-drawn) kept mounting, and some cities entered a "zero-sum game" — unable to sell land, unable to repay debt, having spent tomorrow's money in advance.
Resolving debt is not renouncing development, but changing engines: debt swaps and discipline (repair T), fiscal resources toward public services (make up S), and growth toward innovation and consumption (change the quality of E) — trading "borrowed prosperity" for "earned growth."
Mirrors in Today's World
Borrowing to buy a home, consuming ahead of income, every yuan of earnings sunk into the mortgage — the ledger of E looks fine while f(h) and f(t) are locked away.
Chasing scale and subsidies (E) while building neither technology nor brand (S) and never investing in R&D (T) — when the subsidy withdraws, it is all over in a day.
Trading 996 hours for high pay while draining health and relationships — f(m) rises, f(h)×f(t) falls, and the total of life shrinks.
Infrastructure first, industry lagging behind, new districts becoming "bed towns" — the micro version of heavy E, light S and T.
What the Books Confirm
From the tax-sharing reform to debt resolution: the government's deep participation succeeded by being "inside the game," and its examination questions arise precisely there too — growth must turn toward livelihoods and innovation to be multiplication.
How fiscal relations shape local government behavior: incentives decide the direction of action — what is assessed is what localities pursue; put S and T into the assessment, and someone will be responsible for them.
The cost of misallocating people and resources: excessive administrative intervention in factor allocation amplifies urban-rural and regional imbalance (S harmed) — let the market decide where to agglomerate, and let government supply livelihoods.
The Remedy: A New Connotation of Money
— The Law of Value Conservation · The Way Out
Escaping the habit of the developmental state is not about renouncing growth, but about making growth serve three values: investment shifts from "spreading the pancake" to "filling the gaps" (multiplication of E); livelihoods shift from "deferred" to "prioritized" — education, health care, pensions and distribution cherished by institutions (multiplication of S); debt shifts from "snowballing" to "digestible" — innovation and consumption become the new engine (multiplication of T).
The new connotation of money — let currency carry three values at once:
· Economic value E: every yuan corresponds to real goods and services created, ending "printing without producing";
· Social value S: currency circulates on trust — rewarding those who create jobs, improve livelihoods, and keep wealth with the people;
· Time value T: money is a promise across generations — education, innovation, green growth and continuity are measured, so that we never "eat our children's rice."
When money measures E, S and T at once, the returns on investment, the improvement of livelihoods, and the digestion of debt are all seen on one ledger — the division formula loses its ground, the multiplication formula begins to self-regulate, and the virtuous cycle is triggered.
The Virtuous Cycle: Three-Way Win
| Player | The Virtuous Cycle under the New Connotation of Money | Values |
|---|---|---|
| Nation | Growth turning toward livelihoods and innovation → domestic demand strengthening, debt digested → high-quality development | S + T |
| Enterprise | Profiting from technology and brand → earning markets and long-term returns → a lasting business | E + S + T |
| Individual | Labor rewarded, livelihoods secured → daring to consume, daring to innovate → a multiplied life | All three |
Twin-Blossom Insights
Growth rate is not health. To judge an economy, first see where its ledger is paid out: the share that goes to livelihoods (S) and the future (T) is the true quality of growth.
The warmth of development hides in ordinary people's ledgers — whether there is life beyond the mortgage and growth beyond overtime is the livelihood that "inside the game" ought to see.
The individual's f(m)×f(h)×f(t) and the nation's E×S×T are one and the same thing: only when the three values grow together is the growth real — so it is with the nation, and so with the family and the individual.
Growth may be fast, but the bill must not always be paid by livelihoods and the future.
Investment with quality, livelihoods with a share, debt with continuity — all three above 1 at once is the formula of high-quality development;
creation, trust, continuity — three values measured together, is the underlying code of the three-way win for nation, enterprise and individual.
Frequently Asked Questions
Q: What is the core argument of Lan Xiaohuan's book?
A: To understand China's economy you must first understand its government — deep participation created rapid industrialization and urbanization, and left the examination questions of debt and distribution. The direction of transformation is toward a "service-oriented government."
Q: Why does land finance bring risk?
A: Growth comes to depend on the loop of "sell land — borrow — build infrastructure" (E charging ahead alone), while livelihood distribution (S) is deferred and debt repayment (T) pushed to the future. Once land stops selling, the loop stops turning — the time-difference bill of the division law.
Q: What does the "new connotation of money" mean for ordinary people?
A: It lets money measure economic, social and time value at once. At the personal level this is the micro formula — do not let the chase for income drain your health, your relationships, or your long-term accumulation; keep f(h) and f(t), and your life earns compound interest.