Abstract
Investment in fixed assets – roads, buildings, machinery and other infrastructures – has powered China’s economy for the last two decades. It has driven success in manufacturing export markets and has transformed the physical face of China. At the same time, many commentators worry that China’s growth model relies too heavily on increasingly inefficient investments and that, as a result, its economy has become unbalanced. To sustain growth rates of 8% or higher, they argue, China must shift its economy toward consumption-led growth. While seemingly compelling, the conventional overinvestment story is misleading in certain respects. Our research shows that on some measures China may need more capital, not less. However, the key issue facing China is the distribution of capital and how it is used. In fact, investments in the right areas can stimulate household consumption and provide an entirely new source of balanced growth.
