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

_IMF Working Papers, March 29, 2013_

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## Bibliographic details
- Authors: Il Houng Lee, Murtaza H Syed, Liu Xueyan
- Published: March 29, 2013
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781484309353.001

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### Framework for identifying excessive investment
- 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).

### Empirical findings and regional heterogeneity
- 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.

### Risks, constraints, and implications of current trends
- 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.

### Policy recommendations and preferred investment directions
- 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.

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_Source: https://www.imf.org/en/publications/wp/issues/2016/12/31/chinas-path-to-consumer-based-growth-reorienting-investment-and-enhancing-efficiency-40447_