China’s Path to Consumer-Based Growth: Reorienting Investment and Enhancing Efficiency

IMF Working Papers, March 29, 2013

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Proposes a possible framework for identifying excessive investment.
Uses the method to assess whether some types of investment are becoming excessive in China.
Examines the interaction and causality between private consumption and investment (including "investment granger" as a keyword focus).

Finds evidence that some types of investment are becoming excessive in China, particularly in inland provinces.
In inland provinces:
- Private consumption has on average become more dependent on investment (rather than vice versa).
- The impact of investment on consumption is relatively short-lived, necessitating ever higher levels of investment to maintain economic activity.
In coastal provinces:
- Private consumption has become more self-sustaining.
- Investment tends to benefit household incomes more than corporates, supporting more durable consumption growth.

If existing trends continue, valuable resources could be wasted.
China’s ability to finance investment is facing increasing constraints due to dwindling land, labor, and government resources.
Financing is becoming more reliant on liquidity expansion, with attendant risks of financial instability and asset bubbles.
Investment indiscriminately directed toward urbanization or industrialization of Western regions risks low returns and inefficiency.

Shift investment toward sectors with greater and more lasting spillovers to household income and consumption.
In this context:
- Investment in agriculture and services is found to be superior to that in manufacturing and real estate.
Financial reform would facilitate reorientation of investment, helping China to enhance capital efficiency.
Goal: keep growth buoyant even as aggregate investment is lowered to sustainable levels.