Is investment-based stimulus needed?

The Chinese government took its foot off the brake earlier in the year in response to the deteriorating external environment facing the nation's economy. It front loaded its fiscal spending, eased access to credit, and accelerated investment approvals. Local governments started announcing stimulus packages and relaxed some property measures. Against these developments, the debate continues whether China should again ratchet up investment.

The government, on the other hand, has been relatively firm in its resolve to moderate investment growth and promote consumption, keep property market measures in place, and address income inequality. Can such a position be justified in the face of the current uncertain global environment? Yes.

Let us look at China's consumption, which is at the center of the government's rebalancing efforts and often accused of being too low. At about 47 percent of GDP, consumption in China is indeed low compared with 63-68 percent in Japan and South Korea when their respective per capita GDP was around the same level as China in 2011.