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.
"Qu Hongbin, chief China economist at HSBC, estimates that China's capital stock per person is less than 8 per cent of America's and 17 per cent of South Korea's. Another study, by Andrew Batson and Janet Zhang at GKDragonomics, a Beijing-based research firm, finds that China still has less than a quarter as much capital per person as America had in 1930, when it was at roughly the same level of development as China today."
The argument is not about individual items of investment, which may be riproaring successes or expensive boondoggles, but about the appropriate general levels.
Professor Michael Pettis of Peking University's Guanghua School of Management points to a recent IMF working paper which "finds evidence that some types of investment are becoming excessive in China, particularly in inland provinces [where] private consumption has on average become more dependent on investment (rather than vice versa) and the impact is relatively short-lived, necessitating ever higher levels of investment to maintain economic activity.
"By contrast, private consumption has become more self-sustaining in coastal provinces, in large part because investment here tends to benefit household incomes more than corporates".
The IMF paper urges more care in directing investment where it will better promote household income and consumption and have lasting effects. Otherwise, "valuable resources could be wasted at a time when China's ability to finance investment is facing increasing constraints due to dwindling land, labour and government resources and becoming more reliant on liquidity expansion, with attendant risks of financial instability and asset bubbles".
Pettis suggests that arguments about whether investment is excessive or not are driven by rival models. One model argues that the optimal level of investment is the high level of capital stock per worker set by the most advanced economies.
But there is another model, he says, which "argues that social, political and economic institutions determine the ability of an economy to absorb and exploit capital stock, and because there is a huge variation in these institutions, there is a huge variation in how much investment any economy can usefully absorb".