Richard Yu: Investment-driven or consumption-driven

When discussing the choice between "investment-driven" or "consumption-driven," it is essential to clarify whether we are addressing long-term economic growth issues or short-term macroeconomic regulation issues. When discussing it as a long-term economic growth issue, the "consumption-driven" economic growth model does not exist.

Whether it is Marx's two-class theory, the Harrod-Domar model, or the standard production function, all indicate that economic growth is determined by investment, labor input, and technological progress, and technological progress itself cannot be separated from investment. Without strict limitations, stating that consumption is the "driving force" of economic growth and advocating that China's economic growth model should shift from "investment-driven" to "consumption-driven" is theoretically completely incorrect.

The statement that "consumption drives economic growth" is only correct in the sense that increasing consumption demand can compensate for insufficient effective demand, making the actual economic growth rate equal to or closer to the potential economic growth rate. There is a trade-off relationship between current consumption and investment, but in the long term, consumption and investment complement and promote each other; the key lies in how to balance "current consumption" and "future consumption."

Regarding policy choices to increase consumption demand, since the reduction in consumption demand may primarily result from decreased demand for high-end consumer goods among the middle and high-income classes, measures such as issuing consumption vouchers, reducing personal income tax, and "trade-in for new" may have limited effects. The current biggest issue is the excessive income distribution gap; to increase consumption, it is necessary to achieve income distribution equalization and minimize income disparities as much as possible.

To avoid the circular reasoning of "increasing income to promote consumption, and promoting consumption to increase income," it is necessary to find the "first driving force" of economic growth, which can only be the infrastructure investment financed by the government. Such investments can not only immediately create income and drive consumption through the multiplier effect but also enhance the potential economic growth rate. The view that "China's infrastructure is nearing saturation" is debatable; the CF40 research team estimates that there is still about 31 trillion yuan of incremental public investment space in China over the next five years. For example, there are still many investable areas in the west, and further promotion of the western development strategy should be considered, conducting large-scale infrastructure investments along the Hexi Corridor towards Central Asia, and establishing corresponding economic corridors.

The "Consumption-Driven" Growth Model Does Not Exist

Regarding the term "consumption-driven," it is most often discussed by American economists. A prominent American economist claims that China's long-standing "investment-driven" growth model has brought the Chinese economy to the brink of a financial crisis; another well-known American economist believes that China's "investment-driven" growth model has reached its end.

When discussing the choice between "investment-driven" or "consumption-driven," it is crucial to clarify whether we are addressing long-term economic growth issues or short-term macroeconomic regulation issues. When Western academia discusses China's "investment-driven" model, it actually refers to China's economic growth strategy and growth model, known as the Growth Strategy or Paradigm. How to achieve long-term stable growth of the Chinese economy (development) and how to achieve a specific economic growth target, such as a 5% GDP growth target in 2025, are two fundamentally different issues. The former focuses on medium- to long-term economic growth and studies supply-side issues; the latter emphasizes short-term adjustments and studies demand-side issues.

As a long-term economic growth issue, there is fundamentally no such thing as "consumption-driven" economic growth.

Taking Marx's theory of reproduction as an example, after mathematical formalization of Marx's two departments of reproduction theory, we can obtain:

Where Q represents the total social product, and the subscripts 1 and 2 represent the departments. d and m are the organic composition of capital and the rate of surplus value, respectively, and s is the savings rate.

In the above total social product equation, all savings are converted into investment. The higher the savings rate, the faster the growth of total social product output. The logical conclusion is that the higher the "consumption rate," the lower the growth rate of total social product.

Taking Lenin's theory of reproduction as an example, at the age of 23, Lenin engaged in a debate with the populists in an article titled "On the Market," using "numerical examples" to construct a growth model that is essentially a system of difference equations. Lenin used this model to prove that, despite Russia's poverty and insufficient consumption—the second department could not develop—due to the continuous increase in organic composition, the first department could grow independently of the slow growth constraints of the second department. Therefore, Russia must inevitably enter capitalist society, and the socialist revolution is unavoidable.

Capital accumulation driving economic growth is not only a core viewpoint of traditional Marxist political economy but also holds true in neoclassical economic growth theory. For example, in the earliest modern economic growth theory model—the Harrod-Domar model—"economic growth rate = savings rate / capital-output ratio." Since it is assumed that savings are fully converted into investment, the savings rate equals the investment rate. This model indicates that economic growth is determined by the investment rate and investment efficiency, and an increase in consumption implies a decrease in savings and investment. Under other given conditions, an increase in consumption will lead to a decline in the economic growth rate.

The economic growth rate derived from the standard production function (Cobb-Douglas production function with constant returns to scale) is:

Where α = capital output elasticity, 1-α = labor output elasticity, and A = total factor productivity (technological progress) The model indicates that, given the elasticity of capital output and labor output, economic growth is a function of investment, labor input, and technological progress. Clearly, for decision-makers, investment, labor input, and technological progress are all very important, and the proportional relationship among the three must be well understood.

Currently, the Chinese government places great emphasis on industrial and product innovation, highlighting the role of technological progress in driving economic growth. In this context, it can be said that China faces a choice between "investment-driven" and "technology-driven" growth, but technological progress does not come out of nowhere; it cannot be separated from various forms of investment. Therefore, it can also be said that China faces a choice between "general investment-driven" and "innovation-focused investment-driven" growth.

The production function can be expanded to include factors such as institutional change and human capital. Improvements in human capital are related to factors such as education and health. If consumption has a stimulating effect on economic growth, then this stimulation should be realized through improvements in human capital. However, the transmission mechanism of consumption - human capital improvement - economic growth requires specific quantitative research; it cannot simply be concluded from casual statements. At the same time, the consumption that can improve human capital is of certain specific types, and the provision of this specific type of consumption is inseparable from traditional forms of investment.

In summary, for decision-makers, the degree of dependence of economic growth on investment, labor input, and technological progress will vary at different times due to differing conditions. The growth models at different times can be labeled as "investment-driven," "labor-driven," or "technology-driven." Nevertheless, there is no such economic growth model and strategy as "consumption-driven."

Before the outbreak of the East Asian financial crisis, an American economist criticized the growth of East Asian economies for relying solely on capital and labor input rather than technological progress. Whether his statement was correct is debatable, but he did not advocate for East Asian countries to implement a "consumption-driven" growth strategy at that time.

An economic activity may simultaneously possess both investment and consumption characteristics, and a product may also have the nature of both an investment good and a consumption good. For example, spending on mountaineering and fitness can be viewed as pure consumption expenditure or as an investment in human capital. A car can be both a consumer good and an investment good (depending on its use).

It is undeniable that certain types of consumption, as investments in human capital, have a driving effect on economic growth. The extent to which this type of consumption contributes to economic growth still needs to be determined through empirical research. However, under no strict limitations, stating that consumption is the "driving force" of economic growth and advocating that China's growth model should shift from "investment-driven" to "consumption-driven" is theoretically completely incorrect, and the consequences are not hard to foresee.

Denying the existence of a "consumption-driven" growth model does not mean that more investment is always better. The relationship between investment and economic growth is not linear. Under given conditions, there exists a theoretical optimal value for the investment rate. Taking the Harrod-Domar model as an example, a too high investment rate (savings rate) may lead to an increase in the capital-output ratio, thus excessively raising the investment rate may lead to a decrease in economic growth rather than an increase Of course, the rise in capital-output ratio is not necessarily caused by an excessively high investment rate. For some reason, if the capital-output ratio rises, the government may have to further increase the investment rate to maintain the target economic growth rate. Before the reform and opening up, China had emphasized increasing the savings and investment rates, which resulted in a decline in economic efficiency and an increase in the capital-output ratio. This lesson should not be forgotten.

The Relationship Between Consumption and Investment

There is a trade-off between current consumption and investment, but the relationship between consumption and investment in the long term is complementary and mutually reinforcing. The ultimate goal of production is consumption. Given income, allocating more resources to investment will reduce consumption, and vice versa. However, in the long run, the relationship between investment and consumption is essentially a choice between "consume now or consume less now but more in the future."

How to balance consumption and investment has always been an important research topic in Marxist political economy. The Feldman model proposed by Soviet economist Feldman in 1936 is based on Marx's theory of reproduction. In this model, the total consumption as the output of the second department Y2 can be expressed as:

Where K is capital, V is the capital-output ratio, and subscripts 1 and 2 represent the first and second departments, respectively. The core issue that this model aims to address is whether to "consume more now" or "consume less now to achieve more consumption in the future." The parameter r in the model represents the proportion of investment I1 used for the first department in the total investment I (output of the first department).

Different values of r determine different future consumption paths. From a long-term perspective, to achieve the highest possible growth rate of consumer goods and the overall economy, it is necessary to increase the proportion r of production materials used for the production of the first department in the total production materials of the first department output as much as possible, even though this may affect the improvement of the living standards in the short term.

Feldman and others believe that the most important task for planners is to correctly decide how to allocate investment between the two departments, that is, to select an appropriate value of r. By substituting specific values, it can be verified that if the value of r is high, meaning that more investment is currently used for the production of capital goods and less for the production of consumer goods, the current output of consumer goods will be small. However, as the growth rate of production materials used for consumer goods is higher, over time, the production of consumer goods will grow rapidly and eventually exceed the consumption goods provided by the growth path corresponding to the initially chosen higher value of r, achieving a "bitter first, sweet later" result The trade-off between consumption and investment is also an important research area in neoclassical growth theory. As early as the 1920s, Ramsey conducted pioneering research on this issue. The Ramsey-Cass-Koopmans model demonstrates that more investment is not necessarily better; there exists an optimal level of capital accumulation at which per capita consumption can be maximized. However, the derivation of such models relies on some very strict assumptions, and certain parameters are difficult to determine (such as "time preference" and "consumption discount rate"). These theories can serve as references for economic policy formulation, but their practical value is limited.

The classic growth theory model by Solow assumes that given factors such as the production function, labor growth rate, and capital depreciation rate, there exists a point defined by per capita capital and per capita income along different economic growth paths defined by different savings rates, where there is a stable state (steady state) with zero growth rates for per capita output, per capita capital, and per capita consumption.

Building on the Solow model, Edmund Phelps proposed the so-called "Golden Rule of Capital Accumulation," which states that if the per capita consumption level in the steady state corresponding to a certain savings rate is greater than the per capita consumption levels in all other steady states, then the per capita capital amount determined by that savings rate is the optimal level of capital accumulation. At the optimal level of capital accumulation, the marginal product of per capita capital equals the labor growth rate plus the depreciation rate. The "Golden Rule of Capital Accumulation" is merely a theory about how to achieve the maximization of per capita consumption levels, and it has some reference value for economic policy formulation, but it is not related to the discussion of "consumption-driven or investment-driven."

In addition to theory, Western economists have also conducted empirical studies on the relationship between economic growth and consumption. For example, Barro explicitly points out in his famous textbook "Economic Growth" that cross-country empirical evidence indicates that the impact of consumption expenditure on economic growth is negative. He also notes that the ratio of total investment to GDP has a positive relationship with initial human capital reflected in education and health.

Recent studies by John Ross and others on a large amount of empirical data have demonstrated a super high correlation between GDP growth and consumption growth. The net fixed capital formation as a proportion of GDP is highly correlated with consumption growth, and the larger the economic scale, the stronger the correlation. The results of these empirical studies also indicate that the relationship between consumption and investment is not an opposing either-or relationship, but rather a relationship of "consume more now and less in the future, or consume less now and more in the future."

In the context of China, the public generally places great importance on pension security and tends to leave a certain amount of savings for future generations, resulting in a relatively low consumption tendency and a relatively high investment rate. This preference is neither "good" nor "bad"; how to strike a balance between "now" and "the future" is a public choice problem.

Generally speaking, as per capita income levels rise, the investment rate (capital formation/GDP) tends to gradually decline. However, it is difficult for the government to determine the optimal level of investment rate, and even more challenging to directly decide the overall investment rate of the economy. What the government can do is to adhere to the principles of a market economy while using macroeconomic policy tools to implement counter-cyclical adjustments, smooth economic fluctuations, and stabilize consumer and investment confidence The statement "consumption drives the economy" is only meaningful in the context of insufficient effective demand. Due to insufficient effective demand, economic growth is constrained by demand factors. We can analyze the reasons or possibilities for GDP growth in a given year based on the national income identity. According to the expenditure approach, GDP = C + I + X - M. Here, C, I, X - M represent final consumption, capital formation, and net exports, respectively; government spending G is broken down into other components that make up GDP.

The formula for GDP growth rate based on the expenditure approach is:

In Western economic growth theory, the implicit assumption made for simplification is "where there is supply, there is demand." In short-term macro analysis, since supply cannot be generated immediately, it is assumed that supply is given, and "where there is demand, there is growth." China's current situation is one of insufficient effective demand, so supply constraints and supply structure issues can be temporarily disregarded, focusing instead on the primary aspect of the main contradiction—insufficient total demand.

The purpose of short-term macroeconomic regulation is to make the GDP growth rate determined by the above formula equal to the potential GDP growth rate. If the economic growth rate determined by consumption demand, investment demand, and net exports is lower than the potential economic growth rate, the government should adopt an expansionary fiscal and monetary policy to increase the growth rates of consumption, investment, and net exports, making the actual economic growth rate equal to the potential economic growth rate.

The statement "consumption drives (or fuels) economic growth" is only correct in the sense that increasing consumption demand can compensate for insufficient effective demand, making the actual economic growth rate equal to or closer to the potential economic growth rate. However, if total demand exceeds the potential growth rate, it will trigger inflation. In this case, the government needs to suppress consumption demand or other aggregate demand to keep inflation within the pre-established inflation rate target.

Is China's consumption rate too low?

Many people believe that China's consumption rate is too low. From the data, taking 2022 as an example, China's final consumption was 43% of that of the United States (exchange rate 1:7). In 2022, China's final consumption was 63.8 trillion yuan, accounting for 53.2% of GDP (=63.8/120); in the same year, the United States' final consumption was 21.08 trillion USD, accounting for 82.9% of GDP (=21.08/25.44). In 2022, China's total retail sales of consumer goods amounted to 44 trillion yuan, which, at an exchange rate of 1:7, is 6.29 trillion USD. In the same year, the United States' consumption expenditure on goods and food services and accommodations were 5.94 trillion USD and 1.25 trillion USD, respectively, totaling 7.2 trillion USD China's social retail goods expenditure is 87.4% of that of the United States (=6.29/7.2) (not completely directly comparable).

The main reason for the huge gap between the ratio of final consumption in China to final consumption in the United States and the ratio of China's social retail goods expenditure to U.S. goods + dining expenditure (43% vs. 87.4%) is that the proportion of consumption services in final consumption in the United States is far higher than in China, and the prices of consumption services in the United States are also much higher than in China.

In the United States, the proportion of service consumption in final consumption typically ranges from 60% to 70%. Before the COVID-19 pandemic, the proportion of service consumption in the U.S. was 69%, with service consumption significantly exceeding goods consumption. In contrast, China's consumption structure is completely different. In 2022, the per capita consumption expenditure of residents nationwide was 24,538 yuan, of which per capita service consumption expenditure was 10,590 yuan, accounting for 43.2% of residents' per capita consumption expenditure. The ratio of service consumption expenditure to GDP in China is significantly lower than that in the United States. It remains to be further assessed how much of this is due to quantity and how much is due to price.

It is well known that the prices of service consumption in the United States are much higher than in China. Our own experiences also allow us to perceive that the prices of services (such as housekeeping, home repairs, delivery, cinema, legal fees, etc.) in the United States and other Western countries are significantly higher than in China. For example, the average service fee for an ambulance in Los Angeles is about $1,200-1,300 per trip, while in Guangzhou, the fee for an ambulance trip (including transportation for about 5 kilometers, one doctor and one nurse on call, two stretcher bearers, and pre-hospital rescue fees) is only 148 yuan.

From the perspective of the ratio of consumer goods expenditure to GDP, China clearly exceeds the United States. In 2022, China's GDP was about 70% of that of the United States; social retail is 87.4% of U.S. goods consumption expenditure (including dining). In other words, from the perspective of ownership of consumer goods (such as cars, televisions, air conditioners, etc.), China's consumer expenditure to GDP ratio clearly exceeds that of the United States. Additionally, there are many statistical caliber and methodological issues that tend to underestimate the ratio of final consumption in China to GDP.

Therefore, after considering the differences in consumption structure and prices, the gap in the ratio of consumption expenditure to GDP between China and the United States, as presented statistically, is actually far less significant than the data suggests. Rough estimates show that measured by the ratio of goods consumption to GDP, China is approximately 1.25 times that of the United States.

In short, Chinese residents are more inclined to purchase physical consumer goods, such as cars and televisions; while American residents are more inclined to service consumption, such as legal services. Therefore, from the perspective of the ownership of consumer goods, China's consumption as a proportion of GDP may actually exceed that of the United States Finally, one fact that should not be overlooked is that for a long time, the ratio of real estate investment to GDP in China has far exceeded that of most countries. However, a large portion of real estate investment should be aimed at meeting the consumption needs of homebuyers rather than investment needs. If this type of real estate consumption is included in household consumption, the adjusted consumption rate in China would be much higher than the figures currently published by the National Bureau of Statistics.

Residents' time preferences (or consumption discount rates) vary significantly across different ethnicities, cultures, systems, and generations, leading to different savings rates. For example, East Asian countries generally have higher savings rates, which is one of the important reasons for the East Asian miracle. A higher savings rate (investment rate) and a lower consumption rate are not necessarily problematic; on the contrary, a low consumption rate and a high savings rate may be a significant advantage for a developing country to catch up with developed countries. Each situation should be analyzed specifically rather than generalized.

First, savings should not be forced by the government but should be savings that residents decide on their own. If the public believes that China's current savings rate is too high (and the consumption rate too low) and wishes to increase the consumption rate, there is no problem with that. Conversely, if the public wishes to maintain China's current savings rate, there should also be no problem.

Second, the ratio of disposable income to GDP should be appropriate, neither too high nor too low. However, what is considered appropriate is not only an economic issue but also a geopolitical issue.

Third, the savings rate can be decomposed into a fundamental savings rate determined by cultural, social, and economic growth trends, and fluctuations in the savings rate caused by economic cyclical fluctuations. If a high savings rate is due to a fundamental savings rate that is higher than that of other countries, the government does not need to deliberately lower the savings rate. If the increase in the savings rate is due to "cyclical" reasons (such as being impacted by a shock, a slowdown in economic growth, worsening income expectations, and a reduction in consumption by residents—Keynes's Paradox of Thrift), the government needs to conduct counter-cyclical adjustments to increase the consumption rate and lower the savings rate.

The notion that "China's residents have low disposable income" seems to be another consensus in academia. This consensus often cites the data that in 2022, the disposable income of Chinese residents accounted for 43% of GDP, while this ratio in other countries is generally above 60%.

In fact, the National Bureau of Statistics publishes two sets of data on disposable income: one based on household surveys and the other based on the flow of funds. In 2022, based on the flow of funds, the disposable income of the household sector accounted for 59.3% of GDP, showing a significant difference. The household survey data has systematic biases because the survey requires filling out questionnaires, the subsidy amounts are limited, and low-income groups are more willing to participate, resulting in a sample that is more representative of low-income individuals. Additionally, some residents may have a tendency to "underreport" when filling out the forms.

Compared to other countries, in 2022, Japan's disposable income accounted for 56.22% of GDP, and Denmark for 46.1%, both lower than China's 59.3% calculated based on the flow of funds. The UK was at 61.47%, only slightly higher than China. The national conditions of each country differ, and simple comparisons are insufficient to explain the issues Although the disposable income level of Chinese residents is indeed relatively low, it is not as severely low as some viewpoints suggest. Due to inaccuracies in the statistical data itself, we should not overinterpret certain statistical results.

Compared to other countries in the world, the ratio of disposable income to GDP in China is low, but the ratio of government revenue to GDP is also low. The most prominent feature of China's national income distribution should be that the ratio of undistributed profits of enterprises to GDP is significantly higher than that of other countries. If we hope to increase the ratio of disposable income to GDP, it is obviously not feasible to rely on reducing the ratio of government revenue to GDP. In this case, the only possible option is to reduce the ratio of undistributed profits of enterprises to GDP.

Disposable income of enterprises = after-tax profits + depreciation - dividends. The high ratio of undistributed profits of Chinese enterprises to GDP is determined by multiple factors such as China's economic system, tax system, and counter-cyclical macroeconomic adjustment policies. The high retention of profits by Chinese enterprises may also mean that enterprises need sufficient funds for technological innovation (of course, there is also the issue of listed companies not distributing dividends). The significant technological breakthroughs achieved by many enterprises in China recently are inseparable from the substantial investments made by these enterprises.

At the same time, the debt ratio of Chinese enterprises is significantly higher than that of general countries. In this case, whether the ratio of undistributed profits of enterprises to GDP should be adjusted downwards and how to adjust it is a complex issue that requires separate argumentation. Claiming that the ratio of disposable income of Chinese residents to GDP is too low and implying that the ratio of government revenue to GDP is too high is at least insufficiently evidenced. It should be said that, under the current circumstances, adjusting the ratio of disposable income to GDP is not our top priority.

In terms of physical consumption comparison, China's life expectancy is higher than that of the United States (78.2 years in 2021 compared to 76.1 years); in terms of physical indicators, Chinese residents' consumption is not lower than that of developed countries, and in some aspects, it even leads the United States. For example, calorie intake, protein intake, children's height, urban living area, home ownership rate, years of education, luxury goods sales, per capita meat consumption, etc.

If we consider social physical transfers (STIK), the World Bank's 2021 ICP prices (International Comparison Program 2021 prices) show that China's consumption in housing, education, leisure, and healthcare is more than twice the consumption measured at market exchange rates. Considering China's low inflation situation in the past three years, the consumption in these areas is even higher.

China's current biggest problem is the excessive income distribution gap. Although the Gini coefficient has decreased, it remains at a high level. Data from China Merchants Bank shows that 2.4% of Jin Kui Hua customers hold 81.8% of savings assets. According to Professor Li Shi's research, over the past 20 years, China's income gap has experienced an initial rise, followed by a decline, and is now basically at a relatively stable high level.

The Gini coefficient in 2008 was 0.491, close to the level of 0.5. If a country's income gap Gini coefficient exceeds 0.5, it will be regarded by the international community as a country with extremely unequal income distribution A turning point occurred before China's Gini coefficient reached 0.5, with a slow decline in the income gap's Gini coefficient, but the decrease was not significant, with a drop of less than 3 percentage points over 7 years.

Since 2016, China's Gini coefficient has remained relatively stable, fluctuating between 0.46 and 0.47, indicating that since 2016, there has been no further trend of narrowing the income gap, and the income gap remains at a high level. Reducing the income gap as much as possible is not only related to social fairness and justice but also helps to increase the marginal propensity to consume across society.

In summary, from the perspective of the ratio of consumption to GDP, the gap between China and most countries is not as significant as some self-media promote, but in pursuing the goal of common prosperity, we indeed still have much work to do.

How to Increase Consumption Demand

According to DeepSeek, the ratio of China's final consumption (including household consumption and government consumption) to GDP averaged about 54% over the past decade (2014-2023). In 2010, China's final consumption rate (the proportion of final consumption to GDP) fell to a historical low of 49.1% since the reform and opening up. By 2023, this ratio rebounded to 53.7%.

In contrast, the global average final consumption rate is about 56.5%, while high-income countries generally exceed 70%. Simple international comparisons can only serve as references and do not explain much. For example, a significant reason for China's final consumption rate being only 49.1% in 2010 was that China implemented an expansionary fiscal stimulus plan at that time, with a GDP growth rate of 10.6% and a fixed asset investment growth rate as high as 23.8%. The drop in China's consumption rate to 49.1% in 2010 reflected the consequences of expansionary fiscal policy and did not indicate any change in the propensity to consume among Chinese residents.

After the global financial crisis, the ratio of consumption to GDP in China showed an upward trend, while the ratios of investment and net exports to GDP showed a downward trend. In a state of insufficient effective demand, the shifting proportions of consumption, investment, and net exports in GDP reflect the endogenous changes of macroeconomic variables and the impact of government macroeconomic policies.

According to my estimates, in 2024, the ratios of final consumption, capital formation, and net exports to GDP will be 56.2%, 40.4%, and 3.4%, respectively. Compared to 2023, the main change in the demand structure in 2024 is that the growth rate of net exports significantly exceeds the GDP growth rate, thereby increasing the ratio of net exports to GDP; the growth rate of real estate investment has sharply declined, and the increase in infrastructure investment growth is insufficient to offset the drag of declining real estate investment growth on overall investment growth, resulting in investment growth being lower than GDP growth, leading to a decrease in its proportion in GDP.

When formulating macroeconomic policies, there is no need to overly focus on these changes in proportions; what is important is to identify the demand variables that are more controllable and most helpful in achieving economic growth targets. Recently, the biggest highlight of the Chinese economy has been the continuous expansion of China's manufacturing sector, breaking through the technological blockade imposed by the United States, thereby continuously improving the autonomy and security of China's industrial chain In this regard, Chinese manufacturing enterprises have maintained an average annual investment growth rate of 7%-8% over the past decade, which is commendable. The government should minimize its interference in corporate investment decisions and trust that enterprises have the best understanding of the industry's and sector's development prospects and are most capable of making correct investment decisions.

China's economic growth target for 2025 is set at 5%, but the contribution of net exports to GDP growth may drop from 1.5 percentage points in 2024 to 0, or even lower. Consumption accounts for nearly 60% of GDP. If the consumption growth rate falls below 5%, achieving the annual economic growth target of 5% will face significant difficulties, and the pressure to increase investment growth will rise sharply. Therefore, as an important part of macroeconomic policy in the short term, it is entirely necessary to take various measures to vigorously promote consumption growth.

The problem is that consumption is a function of income, income expectations, and wealth or permanent income. From the perspective of individual households, increasing consumption must first increase income. From the perspective of the overall household sector, increasing consumption requires achieving income distribution equality—further realizing common prosperity. The more equal the income distribution in an economy, the higher the overall marginal propensity to consume in that economic system.

Regarding specific measures to promote consumption, scholars' suggestions mainly include issuing consumption vouchers, reducing personal income tax, and reforming the social security system. The argument for stimulating economic growth through consumption often falls into circular reasoning: to increase economic growth, consumption needs to be expanded; to expand consumption, economic growth needs to be increased. Where should we start?

The proposal to issue consumption vouchers is logically self-consistent. Methods such as giving money or consumption vouchers can temporarily increase income, but the actual effect and sustainability of this impact remain questionable. From January to November 2024, the categories of consumer goods with growth rates below 3.5% are arranged from low to high as follows: gold and silver jewelry (-3.3%), building and decoration materials (-2.3%), cosmetics (-1.3%), cultural and office supplies (-1.3%), automobiles (-0.7%), clothing, shoes, hats, and knitted textiles (0.4%), petroleum and products (0.6%), daily necessities (2.7%), and furniture (2.9%). The categories of consumer goods with growth rates above 3.5% include: pharmaceuticals, food and beverages, communication equipment, household appliances and audio-visual equipment, and sports and entertainment products. It is not difficult to see that the most significant decline in growth rates is in luxury goods, followed by non-essential goods, while the growth rate of essential goods is basically synchronized with or higher than the GDP growth rate. In this context, whether consumption vouchers can significantly drive consumption growth remains uncertain.

First, the decrease in consumption demand may primarily be due to the reduced demand for high-end consumer goods among the middle and high-income groups, which may be significantly influenced by changes in asset prices (such as declines in stock prices and real estate prices).

Second, the consumption demand growth rate of the middle-low and low-income groups is relatively stable. The consumption demand of the middle-low and low-income groups is less affected by changes in income levels; even if income declines, they still must maintain their level of essential consumption In summary, consumption vouchers are unlikely to have a significant impact on the spending behavior of high-income and middle-high-income groups; whereas, due to concerns about future uncertainties, middle-low-income and low-income groups are more inclined to use the additional funds they receive for savings rather than for consumption. Therefore, the issuance of consumption vouchers may not have an important impact on the overall consumption level and growth rate.

Regarding tax reduction, the main issue with lowering personal income tax is that China's tax system is primarily based on value-added tax, and the total amount of personal income tax is limited. In 2023, the total personal income tax in China was 1.4 trillion yuan. The effect of lowering tax rates and raising the tax threshold on consumption growth is relatively limited. However, tax reductions should be considered for enterprises, especially small and medium-sized enterprises.

In terms of the social security system, China's five social insurances (pension, medical, maternity, unemployment, and work injury) are fundamentally based on actuarial principles and should not change the rules for contributions and disbursements of various insurance funds due to the need to implement expansionary fiscal policies. However, some components are closely related to fiscal expenditures; for example, 85% of the funds for the urban-rural resident pension insurance in China's pension system (mainly for farmers) come from fiscal transfer payments, and the disbursement standards for urban-rural resident pension insurance should be raised to gradually reduce the gap between urban and rural pension insurance.

Additionally, the coverage and standards of the minimum living guarantee in the social security system can be further improved. By the end of 2023, the minimum living guarantee benefited 6.636 million urban residents and 33.997 million rural residents, with the national average standard for urban minimum living guarantee being 785.9 yuan per person per month, and the national average standard for rural minimum living guarantee being 621.3 yuan per person per month. Although measures to improve the social security system are primarily aimed at reducing the wealth gap and maintaining social equity and justice, they are not directly related to macroeconomic regulation. However, since low-income groups have a high marginal propensity to consume, these measures can play a certain role in increasing residents' consumption. At the same time, the government should also consider the possibility of providing maternity subsidies.

The "trade-in for new" policy is similar in nature to the issuance of consumption vouchers and will certainly have a positive effect on stimulating consumption. However, the extent of this policy's effectiveness is also worth further study. Moreover, "trade-in for new" is also an industrial policy, and the potential negative impacts of industrial policies must also be noted.

To avoid the circular reasoning of "to increase income, consumption must increase; to increase consumption, income must increase," we must find a "first mover." This first mover can only be the infrastructure investment financed by the government.

An infrastructure investment will immediately generate an equivalent amount of income, which will then produce derived income through new investments and consumption. For consumption, there will be a virtuous cycle of "infrastructure investment leads to income increase → income increase leads to consumption expenditure increase → consumption expenditure increase leads to income increase." The initial infrastructure investment will ultimately generate several times the income of the initial investment.

By increasing infrastructure investment to stimulate consumption, it may not only be more effective than issuing consumption vouchers but also enhance the potential economic growth rate. In addition to infrastructure investment, the government can also support enterprises, especially innovative enterprises, through the implementation of industrial policies. **

From the perspective of "promoting consumption," the infrastructure investment areas to consider include: First, infrastructure investments that are not directly related to consumption. Although these investments are not directly related to consumption, they can increase residents' permanent income, thereby increasing consumption.

Second, infrastructure investments that meet future consumption needs, such as people-centered new urbanization construction, various types of nursing home construction, training and wage subsidies for professional caregivers, hospital construction, and nurseries. This type of investment, which focuses on future consumption, not only helps to compensate for the current lack of total demand but also increases the proportion of service consumption (without elderly care facilities, there are no elderly care expenditures) in consumption; it can increase current employment and also boost future employment (increasing the proportion of labor-intensive industries).

Third, improving consumer goods and services (such as dining, tourism, etc.) from the supply side, as this type of supply can create demand.

Vigorously leverage the role of infrastructure investment in stabilizing the economy and promoting growth

In China's specific institutional environment, infrastructure investment is a policy variable that macro-control authorities can directly control. In addition to compensating for the current lack of total demand, it can also enhance China's potential economic growth rate. Treating infrastructure investment, rather than investment in a specific manufacturing sector, as a policy variable is determined by the "foundational, public, and long-term" nature of infrastructure.

Long-term economic growth relies on investment. Although decision-makers can make a general judgment about the future development trends of industries based on existing information, it is difficult to specifically determine how to allocate investment funds for the development of "high-tech industries" (such as semiconductors and chips, high-end machine tools, large aircraft, big data, artificial intelligence and robotics, new energy, big health and biotechnology, quantum computing and space economy, cross-border e-commerce and globalization services) and "traditional industries" (such as machinery, electronics, chemicals, metallurgy, building materials, light industry, textiles) that account for 80% of manufacturing output.

Government-led infrastructure investment can not only provide important support for the development of these industries but also avoid "overcapacity" in industries and products due to erroneous decision-making. For example, the government may not have known in advance that artificial intelligence would become the most important emerging industry or that electric vehicles would replace fuel vehicles as the mainstream in the automotive industry, but the government understands the importance of electricity supply for economic development. Therefore, it has long insisted on investing in new and old infrastructure such as thermal power, hydropower, nuclear power, wind and solar energy, ultra-high voltage, charging piles, and integrated energy. This large-scale investment in electricity infrastructure has laid a solid foundation for the development of China's manufacturing industry—regardless of the form this development takes—that is difficult for other countries to match.

An important "argument" against the government promoting economic growth by increasing the speed of infrastructure investment is that China's infrastructure is "close to saturation." This viewpoint is debatable. The CF40 research team estimates that there is still at least about 31 trillion yuan of incremental public investment space in China over the next five years. A report from an authoritative research institution pointed out that the infrastructure investment required for urban underground drainage systems alone amounts to 4.5 trillion yuan On December 12, 2024, the Central Economic Work Conference proposed to "improve investment efficiency." Investment efficiency includes not only commercial returns but also economic and social benefits. Due to the "public nature, long-term nature, and foundational nature" of infrastructure, the success of infrastructure investment projects depends on their spillover effects.

Taking 5G as an example, China's investment in 5G construction has exceeded 730 billion yuan. As of the end of July 2024, the total number of 5G base stations reached 4.042 million, and the number of 5G mobile phone users reached 966 million. The investment is mainly borne by China Mobile, China Unicom, and China Telecom (some internet companies and equipment manufacturers also participate in the investment of 5G base stations), and the government has also provided some support. Without the construction of base stations, the development of Alibaba, Tencent, and Huawei would be impossible; without huge power generation capacity, how could there be big data computing power? How could related startups develop?

It is unreasonable to expect public investment projects to achieve commercial returns in the short term. The three major telecom operators engaged in base station construction are profitable, while other projects, such as high-speed rail, according to the financial report data of China National Railway Group, experienced significant losses before 2023. However, the construction of the high-speed rail network has transformed the entire economy and social life of China, and its social benefits are immeasurable.

China's infrastructure investment and construction capabilities are a systemic advantage, and the period of insufficient total demand is precisely the time to maximize this advantage. Once the economy fully recovers and grows autonomously, government-led infrastructure investment can gradually exit as macroeconomic stimulus policies are withdrawn.

It is undeniable that there have indeed been serious issues such as waste and redundant construction in past infrastructure investments. In December 2024, the State Council released a list of prohibited projects for local government special bonds, which is very necessary and should be used as an important standard for the approval of infrastructure projects. Large-scale infrastructure investment projects may even breed corruption, but such issues can be resolved through legal and political means, and we should not throw the baby out with the bathwater.

In an article in 2016, former U.S. President's Council of Economic Advisers Chairman Jason Furman pointed out that compared to 1994-2004, almost all G7 countries experienced a significant decline in capital deepening rates and total factor productivity growth from 2004 to 2014. According to the analysis framework of Solow's growth theory, labor productivity is determined by capital density (or per capita capital equipment level) and total factor productivity. The simultaneous decline in total demand and labor productivity growth in G7 countries is not coincidental; insufficient demand has led to severely inadequate investment, and the decline in capital density growth is the most important reason for the decline in labor productivity growth in G7 countries. Among them, Japan experienced the largest decline in capital density growth, at 3%. Furman's research indicates that increasing total demand rather than reducing investment growth is a necessary condition for improving labor productivity (i.e., per capita GDP).

In 2025, the government has formulated a fiscal policy with an expansionary effort far greater than before, with the general public budget deficit ratio set at 4% for the first time. However, given the severe external challenges China faces in 2025, there seems to be room for discussion on whether the expansionary efforts of China's fiscal policy are sufficient During the "14th Five-Year Plan" period, can the government arrange some large projects similar to those executed during the 4 trillion yuan stimulus plan? For example, further promote the Western Development Strategy, carry out large-scale infrastructure investments along the Hexi Corridor towards Central Asia, and establish corresponding economic corridors.

Central Asia is located in the central region of the Eurasian continent and is a key area connecting the heartland and the periphery of Eurasia. Linking the Western Development with the construction of the Central Asia Economic Corridor is of great significance for stimulating domestic demand, enhancing China's domestic security, and geopolitical status.

In the West, there are numerous investable areas. As Mr. Zhu Yunlai said, "Northwest China has unique advantages in solar energy resources, with abundant sunlight and mostly flat Gobi terrain that has little other economic value, making it extremely suitable for building large photovoltaic bases. A 3,000-kilometer transmission line can deliver 200 million kilowatt-hours of electricity daily. China's average daily electricity consumption is about 27.4 billion kilowatt-hours, theoretically, 100 such transmission lines could meet the national electricity demand. Notably, the current cost of photovoltaic power generation has significantly decreased, with overall costs only half that of thermal power systems. Coupled with battery storage technology, it is also expected to achieve stable power supply from photovoltaic generation around the clock." With such multifaceted infrastructure investments, when else should we act if not now?

We look forward to the National Development and Reform Commission releasing the project list for the "14th Five-Year Plan" period soon.

China Financial Forty Forum, original title: "Full Text | Yu Yongding: Investment-Driven or Consumption-Driven"

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