Too much of a good thing

Is Beijing spending too much on investment for the good of the mainland economy? It may seem an arcane question of interest only to practitioners of the darker side of economics, but in reality it is a vital issue for the country's pace and quality of economic growth as well as the rebalancing of the economy.

Economists disagree about government investment on the mainland. Those doing the reports at investment banks tend to be more sympathetic to claims that Beijing still has a long way to go and can pile on investment spending, since it is necessary for economic growth.

Academic economists, including some at the International Monetary Fund, however, warn that Beijing needs to be careful about wasteful spending on investment, not least because investment spending is now running at almost 50 per cent of gross domestic product, while consumption spending has fallen to 35 per cent, historically low for any country, especially a developing one. The mainland invests far more as a percentage of GDP than any other major economy. In 2000 it was way ahead of the world, with investment of about 35 per cent of GDP. South Korea then was the closest competitor, with investment spending taking 31 per cent of its GDP, followed by India with 24 per cent and Japan with 21 per cent.

By 2011, the mainland's investment spending was almost 50 per cent, while India's had grown to 38 per cent and Japan to 25 per cent. In the established economies of Germany and the US, investment spending is now below 20 per cent of GDP.

Economists at investment banks point to a different perspective. In an Asia Economics Analyst report last year, Goldman Sachs claimed that "focus on the investment/GDP ratio risks confusing flows and stocks and we believe is not the right metric for assessing whether a country has invested too much.

"We also care about the capital stock rather than the investment flow. On this metric, China still has a long way to go. Its capital stock/worker is only 6 per cent of Japan's level and 16 per cent of Korea's."

The Economist magazine a year ago made a similar point and usefully quoted other bank economists. It argued that "an annual investment-to-GDP ratio does not reveal whether there has been too much investment. To determine that, you need to look at the size of the total capital stock - the value of all past investment, adjusted for depreciation.