China still needs high investment but needs to change its investment focus

Abstract The Financial Times recently published an article by its Beijing bureau, Ji Miou, highlighting a shift in economic thinking about China’s growth model. Previously, economists believed that the country’s “unbalanced, uncoordinated, and unsustainable” growth could be corrected by boosting household consumption and cutting back on inefficient investment. However, more and more experts are now challenging this long-held view. They argue that while rebalancing is still necessary, China must continue high levels of investment for years to come—but with a strategic focus on areas like public services and infrastructure. The article outlines these evolving perspectives.

Over the past decade, many economists, including official policymakers, have advocated for a shift toward higher consumer spending and reduced investment. Yet, despite efforts to stimulate small-scale consumption and curb investment, recent data suggest that the trend has reversed. In 2013, consumption contributed 50% to GDP growth, while investment accounted for 54.4%, indicating that investment remained the dominant driver of economic growth. The slight gap between the two percentages is due to negative contributions from net exports.

China appears to be facing challenges in transitioning to a more balanced economy, prompting increasing skepticism about the traditional approach of boosting consumption and reducing investment. Many now argue that high investment is still essential but should be directed toward more productive sectors.

There's no need for empty housing developments in remote areas, or for underused airports and government buildings that mimic Western architecture. In recent years, investment has become increasingly reliant on credit, but much of it has failed to deliver real returns, leading to growing non-performing loans.

To identify where China needs to invest, one only needs to spend a few days in cities like Beijing and listen to the concerns of ordinary people. Improving public transport, clean energy, environmental protection, and industrial upgrading are all areas with huge potential. Investments that help reduce pollution and ease urban congestion are also critical.

Perhaps the most urgent need is in the service sector, particularly healthcare. While heavy industry faces overcapacity, China’s service sector remains underdeveloped and lacks excess supply.

Two key points are often overlooked in this debate. First, although the share of consumption in GDP has declined, per capita consumption has grown by around 8% annually. Second, a sharp slowdown in investment could lead to slower job growth and falling wages, which would ultimately hurt consumption. As Huang Yuchuan, former director of the World Bank’s China Operations, pointed out: “The problem isn’t imbalance—it’s ensuring that investment is used efficiently and effectively.”

Shifting investment toward services and sustainability can also address a common misconception—that China must transition to a consumer-driven economy.

Yang Ruihui, an economist at Cheung Kong Graduate School of Business, noted: “The world cannot afford the consequences of China becoming a mass consumer society. It’s incompatible with resource constraints and not an effective path to balance.”