A fine balance

Top economist's remarks on the dangers of over-reliance on consumption to reorient economic growth spark debate

Does China need to consume more? Despite the Chinese now being famous across the world for snapping up luxury goods and pressing their noses against shop doors at New Year sales in London and elsewhere, household consumption as a share of GDP was 37.7 percent, according to the World Bank latest figures, compared to around 65-75 percent in European countries and the United States.

It is a central aim of the Chinese government in the current Five-Year Plan (2011-15) to rebalance the economy toward being more consumption driven.

Chinese Premier Li Keqiang declared it a key goal at a forum in Beijing in March. "China will expand its opening-up policy, and the nation needs to promote domestic consumption through continuing to open up its markets," he said.

There have been fears that relying on investment - particularly after the global financial crisis and the government's 4.1 trillion yuan ($670 billion; 517 billion euros) stimulus package - could lead to some future investment bust, as it happened in Japan two decades ago.

It therefore came as a surprise when one of China's most prominent and respected economists - Justin Yifu Lin, former chief economist at the World Bank - warned recently that China risked a potential disaster if it made a dash for consumption.

"Those who advocate that China's economy should rely on consumption are, in fact, pushing the country to a crisis. I've never seen any country that falls into crisis because of over-investment," he said.

His remarks have prompted a renewed debate about China's economic model and whether it is too reliant on fixed-asset investment and exports. We asked eight prominent economists and China experts on whether there has been too much preoccupation with driving up consumption levels.

Donna H. J. Kwok, Greater China economist for HSBC in Hong Kong, believes there is a far bigger risk if China was to retain its current model without adopting measures to encourage consumption.

"The risks posed to China's long-term economic health if no measures are adopted to push the country towards a more consumption driven model, far outweigh the risks posed by the actual adoption of such measures.

"Relative to China's own history and other developed and developing countries across the world, China's private consumption to GDP ratio today is low. As such, China needs to, and in fact has, already started to adopt policies to reflate consumption as a key driver of economic growth."

Jian Chang, China economist and a director of Barclays in Hong Kong, says Lin's position is very much a "minority view".

"I think the direction he is pointing to is somewhat against where we would like to see China develop and that is to a more market-orientated economy and less led and directed by the central government.

Louis Kuijs, China economist at Royal Bank of Scotland in Hong Kong and who was a senior economist at the World Bank during Lin's period as chief economist, also says China has to change its growth model.

"I used to have these discussion at the World Bank. China cannot continue to increase its investment-to-GDP ratio. It is just not possible economically.

"I have sympathy with the argument also that it doesn't make sense to hand out credit cards to try and stimulate consumption but China definitely needs a better balanced pattern of growth."

Lin, who argues that sustainable consumption can only come from investment in upskilling the economy so workers have higher wages to spend, has his defenders, however.

Zhu Tian, professor of economics at CEIBS (China Europe International Business School) in Shanghai, believes the former World Bank vice-president has made an important contribution to the debate about consumption.

"In economic theory there is actually no such thing as consumption-driven growth. No serious academic would ever use the term and you can't find it in any text book.

"In theory low consumption is not a bad but a good thing. When the IMF and the World Bank refer to African and Latin American countries, they all talk about the need for sustained investment growth.

"Most of sub-Saharan Africa is poor not because they don't know how to consume but because they don't have the production capacity, both human and physical."