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High levels of investment – and debt – are good for China’s economy

Frank Newman and Dan Newman argue that the Chinese propensity to save means significant investments – provided they are productive – are needed to support demand, and are not to be feared

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Many economists believe China should cut investment to make room for consumption. But, in fact, investment provides critical support for consumption. Photo: EPA

Many economists believe China should curtail economic investment to make room for rising consumption, and that it should avoid debt. But because of the high tendency to save, high levels of investment are essential for China’s growth, including some financed by debt.

Investment – private sector and public – means building facilities and infrastructure. It also provides critical support for consumption.

In the most basic national economic equation, gross domestic production is the sum of four components: consumption, investment, government consumption and net exports. Saving is defined as what is not spent on consumption and government consumption, and is equal to investment and net exports combined.

Significant investment supports healthy consumption, particularly when people spend a relatively low portion of their income

Saving is much higher in China than in the US. As a share of GDP, China’s consumption, investment, government consumption and net exports come to 38 per cent, 44 per cent, 15 per cent and 3 per cent respectively. The comparable figures for the US are 68 per cent, 17 per cent, 18 per cent and minus 3 per cent. Thus, China’s saving is 47 per cent of GDP, compared with America’s 14 per cent.

The Chinese tendency to save means investment is crucial to a healthy economy in China.

To raise national income, significant changes in government consumption or net exports are not practical. By contrast, investment can vary substantially, and is a prime driver of consumer income, and thus spending. Significant investment supports healthy consumption, particularly when people spend a relatively low portion of their income.

READ MORE: China needs real growth that only a shift away from investments can deliver

Women carry shopping bags in Times Square, New York. Saving is much higher in China than in the US. China’s saving is 47 per cent of its gross domestic product, compared with America’s 14 per cent. Photo: Reuters
Women carry shopping bags in Times Square, New York. Saving is much higher in China than in the US. China’s saving is 47 per cent of its gross domestic product, compared with America’s 14 per cent. Photo: Reuters
High levels of investment are essential in an economy with a high rate of saving. Imagine a community that produces 100 million yuan (HK$120 million) of consumer goods and services in a month. If people save half their income, they’ll buy only 50 million yuan the next month, leading to underemployment and underproduction. This need not happen if the community adds 50 million yuan of investment: in the form of buildings, transport and water systems. Now it has a steady income of 100 million yuan – half from producing consumer goods and services, and half from building investments – as well as the benefits of improved productivity from many of the projects.

READ MORE: Better, faster, stronger: China’s new ambitious five-year plan aims to make the nation more efficient

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