The Chinese economy has entered a "new normal" characterized by a slowed growth rate. The three major growth drivers, namely demographic dividends, dividends from institutional reforms and investment, are running out.
The "new normal" is also characterized by continuous optimization of the economic structure and a shift from investment-driven to innovation-driven growth. Many scholars argue that over-investment has caused imbalance in many areas, such as a large proportion of manufacturing sector in the economy and insufficient consumption. Therefore, they think the proportion of investment should be reduced if China wants to realize economic restructuring and the shift in growth drivers.
However, it's wrong to think that investment is contradictory to economic restructuring and a shift of growth drivers. This is a misunderstanding. Investment can lay the material and technological foundation for the expansion and upgrade of future consumption. For instance, investment in network infrastructure will forge a solid foundation for the surge and upgrade of future spending.
Admittedly, technological progress should be the major driver of economic growth. But even so, it depends on physical capital, and the applicability of new technologies can only be examined and improved after investment makes it concrete in real life.
For instance, the reason why China's high-speed railway technology leads the world is because large-scale high-speed railway construction within the country has greatly helped improve the technology. Therefore China's high-speed technology is quite mature and can be popularized around the globe.
The investment of physical capital is the ultimate source of economic growth. With that being said, we require greater efficiency of investment. Whether an investment is worthwhile depends on whether it can transform and lay the foundation for the expansion and upgrade of future consumption. Only in this way can technological progress make concrete contributions to a country's economic growth.
The investment ratio in Western countries is only about 15 percent, but such a low investment ratio has met the consumption demand and realized technological progress in those countries. That's partly because the investment efficiency is quite high in those countries. By contrast, investment has been growing at a speed of as high as 25 percent a year in China since it began the reform and opening up in 1978, but per-capita infrastructure and public service capacity in the country still lags far behind that of Western countries or even the world average level.
The excess investment in China mainly lies in repetitive investment in traditional manufacturing industry, rather than over-investment throughout society. Besides, excess investment is mainly caused by low efficiency of investment, as evidenced by the fact that China's total factor productivity is only one fifth of that in the United States. China still has a huge investment gap to fill in fields such as education, medical health, environmental protection, underground pipe networks, rural areas and infrastructure construction amid the ongoing urbanization drive. With experience accumulated in those areas, China will have more competitiveness in infrastructure-related technology.
In addition, infrastructure investment in the above-mentioned fields will help improve China's social security system, facilitate urbanization and lower the consumption costs. Urbanization and the increase in consumption will help China optimize its industrial structure. Meanwhile, infrastructure construction will help increase the value of human resources in China and improve the skills of Chinese laborers.
The second demographic dividend will be unleashed in China, with more migrant workers becoming real urban dwellers after gaining entitlement to the same social security as any urban residents. Meanwhile, China's saving rate is much higher than that in developed countries. If reforms in the investment system can be bolstered and investment efficiency can be fully vitalized, it won't be long before the country realizes economic restructuring and a shift of growth drivers.
This is an edited excerpt of an article published in Securities Times