Last Friday, mainland retail giant Gome Electrical Appliances Holding announced first-half profits down 50 per cent compared with a year ago. Not surprisingly most of the media commentary concentrated on the shenanigans of former chairman Wong Kwong-yu, who continues to exert his influence over the company he founded, despite his detention nine months ago on suspicion of fraud. Yet although Mr Wong's dealings make fascinating copy, there was an even more important story wrapped up in Gome's statement. The slump in the company's earnings was driven by an 18 per cent decline in first-half sales. That fall came despite generous government subsidies aimed specifically at supporting consumer demand for household appliances, illustrating just how difficult it will be for the mainland to engineer a switch from investment- to consumption-led growth. Over recent decades, consumer demand has become less, not more, important to the Chinese economy. As the first chart below shows, household consumption has been crowded out by government-directed investment and has fallen from more than 50 per cent of gross domestic product in the early 1980s to just 36 or 37 per cent in the last couple of years. As the second chart below shows, that is extremely low compared with the big developed economies or other large developing countries. Even then, a level of 36 or 37 per cent may exaggerate the role of private consumption in the mainland economy. Working from surveys of household spending rather than from official GDP expenditure figures, many economists believe the true ratio of private spending is nearer to 31 or 32 per cent. Either way, the authorities are well aware that the low level of consumption poses a big problem for China's future growth trajectory. Back in early 2007, Premier Wen Jiabao called the mainland's economic mix 'unbalanced, unstable, unco-ordinated and unsustainable'. The list of problems he identified was long and daunting, but at its heart was the imbalance between investment and consumption, which threatened to misallocate resources into building massive over-capacity. More than two years on and the problem has become even more pronounced. As Gome's results show, uncertainty has weighed on consumers' discretionary spending, while government stimulus efforts have skewed the economy even more towards reliance on investment. In recent months most of the talk about increasing household spending has concentrated on persuading consumers to reduce their precautionary savings by improving health-care and pension provisions. Yet, according to a paper published this month by the economic research arm of management consultancy McKinsey, the effect of strengthening the social safety net would be relatively small. McKinsey's analysts estimate that jacking up welfare spending 11 trillion yuan (HK$12.48 trillion) annually would raise the share of private consumption in the overall economy by just 1.1 percentage points by 2025. If the government is to succeed in boosting consumer demand, it will have to look elsewhere. Improving the retail industry's distribution channels could make a significant difference, as could expanding the availability of consumer credit facilities. McKinsey estimates that these and similar efforts could increase consumers' share in economic output by as much as 4.7 percentage points. Yet even all those measures would still leave the proportion of private consumption in China's economy looking low by international standards. If the authorities really want to increase consumption, they will have to engineer a big increase in ordinary people's incomes. There are two obvious ways to do this. Firstly, the government should level the financial playing field between state-controlled heavy industries and private-service sector businesses in order to encourage the growth of small companies and their share in the economy. The authorities should also push through state-sector dividend reform and financial-sector liberalisation, allowing households to earn more investment income. Together, McKinsey estimates these steps could help raise the share of consumption in GDP by an additional 6 percentage points. Altogether, according to McKinsey, government reforms could lift private consumption to more than 50 per cent of GDP by 2025; more in line with other big developing economies. That would clearly be good news for struggling retailers such as Gome, although the reforms will surely come too late for the incarcerated Mr Wong.