China must not view investment and consumption as two mutually exclusive, opposing forces. Increasing investment is key to ensuring and maintaining healthy levels of consumption.

Lin Yifu, the former chief economist of the World Bank.[File photo]

During the annual Boao Forum for Asia, which took place in Boao, south China's Hainan Province, on April 6-8 this year, opinions differed on how consumption and growth could be boosted. Lin Yifu, the former chief economist of the World Bank, pointed out that in future, China will stick to an investment-driven growth pattern. Zhang Weiying, professor of economics at Peking University, disagreed, however, citing his preference for a consumption-dominated development model.

Although investment and consumption belong to different sectors, they are not opposing forces. After all, investment is the process by which consumption is stimulated. Only investment can truly create more consumption. A quick review of China's economic reality shows that increasingly efficient investment leads to a healthy and continuous spike in consumption.

In the wake of the international financial crisis, China promoted a 4-trillion yuan stimulus plan designed to boost the economy. During this period, China's level of consumption saw a rapid increase, as evidenced by automobile sales, which were estimated at 1 million per year before the crisis, rising to 20 million in 2012. This pattern was mirrored in China's real estate market.

Investment and consumption are really two sides of the same coin. Following a big increase in investment, consumption expands accordingly. In the long term, each penny invested in purchasing machines, materials and employing workers will be converted into company profits and workers' wages, which, in turn, will trickle down into consumption.

Investment is principally the behavior of government and enterprises, while consumption is the conduct of individuals and families. In practice, increased investment by government and enterprises will indirectly raise the income of individual citizens, which, in turn, will boost consumption.

Financial crises are generally the result of excessive consumption, rather than excessive investment. Financial crises experienced by the U.S., such as the Great Depression, the economic stagnation of the 1970s and the current financial crisis were all consequences of excessive consumption.

It would be a mistake, though, to blindly compare China's situation to that of developed countries, as the so called "high-level of consumption" in developed countries refers to their high ratio of consumption to GDP, rather than total consumption.

It is said that China has a low level of consumption; however the relevant data cannot accurately reflect the actual consumption level of Chinese citizens: The National Bureau of Statistics included the housing consumption, the biggest expenditure among Chinese citizens, in investment statistics and excluded it from consumption data.

The author is a researcher at Shanghai Jiao Tong University.

The article was first published in Chinese and translated by Ma Yujia.

Opinion articles reflect the views of their authors, not necessarily those of China.org.cn.

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