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
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
