<p><strong>From the Chinese perspective</strong>, it's "dangerous" because high investment for so many years, particularly when driven by state incentives or by state-owned firms might induce <a href="https://www.ft.com/content/253d7eb0-ca6c-11e5-84df-70594b99fc47" rel="nofollow noreferrer">mis-allocation of resources</a>, high indebtness levels and excess capacity (some might say even voluntary, for example <a href="https://en.wikipedia.org/wiki/Dumping_(pricing_policy)#Chinese_economic_situation" rel="nofollow noreferrer">dumping</a> in steel to <a href="https://theconversation.com/fact-check-is-china-dumping-steel-76916" rel="nofollow noreferrer">hurt developed countries' industries</a>). For instance, <a href="https://www.economics.ox.ac.uk/materials/working_papers/paper441.pdf" rel="nofollow noreferrer">this paper</a> states that:</p>

<blockquote>
  <p>The main  objective  of  management  in  Chinese  state-owned  and  state-
  dominated  firms  has been  to  maximise  not  profits  but  the  growth  of  investment  and  output.  The  reward  to such  bureaucrats  takes  the  form  of  prestige,  power  and  the  accompanying  perks  of commanding an organisation; the reward being greater the larger the organisation.</p>
</blockquote>

<p>Another reason is that investment is <a href="https://www.enotes.com/homework-help/why-investment-spending-more-sensitive-than-373971" rel="nofollow noreferrer">more volatile</a> than consumption. However, if investment is supported importantly by state-owned enterprises, this might not apply well to China, which by the way have not had a recession in decades).</p>

<p><strong>From a western perspective</strong>, high investment (and low consumption) contributes to a high trade balance surplus and therefore to a high <a href="https://tradingeconomics.com/china/current-account" rel="nofollow noreferrer">current account surplus</a>, which might be good for the central bank of China (accumulation of reserves) aiming to keep the Yuan relatively low to foster the competitiveness of the export sector, but is bad news for the rest of the world. The latter would benefit from higher consumption of the Chinese population (via Chinese imports and rest of the world's exports). The same story is told of <a href="https://www.economist.com/news/leaders/21724810-country-saves-too-much-and-spends-too-little-why-germanys-current-account-surplus-bad" rel="nofollow noreferrer">Germany</a>, which would help other countries (mainly European partners, because of same currency) by rebalancing its economy from exports toward more consumption. </p>

<p>Additionally, note that some economists have blamed China (among others) for the Great Recession (e.g. <a href="http://foreignpolicy.com/2012/01/17/how-chinas-boom-caused-the-financial-crisis/" rel="nofollow noreferrer">here</a> or <a href="https://www.brookings.edu/research/global-saving-glut-monetary-policy-and-housing-bubble-further-evidence/" rel="nofollow noreferrer">here</a>), partly because of their voracious reserve accumulation policies, a core element in the export-led Chinese development strategy. Thus, a more rebalanced global economy might be good for the world economy as a whole, decreasing the likelihood of another recession. </p>

CC BY-SA 3.0
2017-08-10T07:34:31.360Z
2017-08-10T07:43:09.637Z
2017-08-10T07:43:09.637Z
luchonacho
<p>Some economists argue that China should head towards a consumption-led and especially a productivity-led growth because their investment-led growth is not sustainable (as you stated), at least not in the long run. China already relies heavily on exports, plus they produce more than the rest of the world can consume which obviously leads to certain difficulties in the future. </p>

<p>Although China's growth in the last quarter of a century has been impressive, some experts assert that China's growth rate could be much higher if the resources would be used more efficiently. This inefficiency is - according to them - due to the enormous investment projects that China has carried out. In addition, China's workforce will shrink in the future which makes relying heavily on investments more difficult to achieve.</p>

<p>I hope my explanation is helping, I know it is far from the only way to look at China's economic growth.</p>

CC BY-SA 3.0
2017-06-10T21:50:46.270Z
[re: inefficient investment projects] I know their state owned enterprises are not efficient and propped up. But that does not seem to be a pitfall of investment-led growth in general: that's a criticism of what, specifically, China invested in. Or is the idea that allocating resources to investment will always be less efficient if you are monomaniacial about it?
thewhitetie
CC BY-SA 3.0
2017-06-11T09:14:28.597Z
It is dangerous because they can hardly keep up the investment-led growth (on its current level) in light of their demographic situation _and_ because they highly depend foreign demand. Because of that, many experts point to the inefficiency in the state-owned enterprises. If the owner of these firms (i.e. the Communist party) manages to make these firms productive (e.g. by privatizing them), China would not have to rely as much on investments as they do now.
Kuma
CC BY-SA 3.0
2017-06-10T14:35:44.310Z
2017-06-10T14:35:44.310Z
Kuma
<p>I keep reading that China must switch to consumption-led growth or productivity-led growth, that investment-led growth is 'dangerous.'</p>

<p>I understand that it is probably not sustainable in the sense that returns on capital will start to fall after awhile. But what else is the danger?</p>

CC BY-SA 3.0
2017-06-08T12:43:42.727Z
Consumption is base on unlimited population growth. Urbanization will cause population shrink over time. Also higher income will demands better quality of goods/services.
mootmoot
<macroeconomics><economic-growth><investment><development-economics>
What is the danger of (China's) investment-led growth as opposed to consumption-led growth?
thewhitetie
# What is the danger of (China's) investment-led growth as opposed to consumption-led growth?

(Asked by: username_0 on 2017-06-08)

I keep reading that China must switch to consumption-led growth or productivity-led growth, that investment-led growth is 'dangerous.'

I understand that it is probably not sustainable in the sense that returns on capital will start to fall after awhile. But what else is the danger?

**Tags:** macroeconomics, economic-growth, investment, development-economics

> **Comments:**
> **username_1**: Consumption is base on unlimited population growth. Urbanization will cause population shrink over time. Also higher income will demands better quality of goods/services.  

---

## 2 answers

### Answer by username_2 on 2017-08-10. Score: 1

**From the Chinese perspective**, it's "dangerous" because high investment for so many years, particularly when driven by state incentives or by state-owned firms might induce [mis-allocation of resources](https://www.ft.com/content/253d7eb0-ca6c-11e5-84df-70594b99fc47), high indebtness levels and excess capacity (some might say even voluntary, for example [dumping](https://en.wikipedia.org/wiki/Dumping_(pricing_policy)#Chinese_economic_situation) in steel to [hurt developed countries' industries](https://theconversation.com/fact-check-is-china-dumping-steel-76916)). For instance, [this paper](https://www.economics.ox.ac.uk/materials/working_papers/paper441.pdf) states that:

> The main objective of management in Chinese state-owned and state-
> dominated firms has been to maximise not profits but the growth of investment and output. The reward to such bureaucrats takes the form of prestige, power and the accompanying perks of commanding an organisation; the reward being greater the larger the organisation.

Another reason is that investment is [more volatile](https://www.enotes.com/homework-help/why-investment-spending-more-sensitive-than-373971) than consumption. However, if investment is supported importantly by state-owned enterprises, this might not apply well to China, which by the way have not had a recession in decades).

**From a western perspective**, high investment (and low consumption) contributes to a high trade balance surplus and therefore to a high [current account surplus](https://tradingeconomics.com/china/current-account), which might be good for the central bank of China (accumulation of reserves) aiming to keep the Yuan relatively low to foster the competitiveness of the export sector, but is bad news for the rest of the world. The latter would benefit from higher consumption of the Chinese population (via Chinese imports and rest of the world's exports). The same story is told of [Germany](https://www.economist.com/news/leaders/21724810-country-saves-too-much-and-spends-too-little-why-germanys-current-account-surplus-bad), which would help other countries (mainly European partners, because of same currency) by rebalancing its economy from exports toward more consumption.

Additionally, note that some economists have blamed China (among others) for the Great Recession (e.g. [here](http://foreignpolicy.com/2012/01/17/how-chinas-boom-caused-the-financial-crisis/) or [here](https://www.brookings.edu/research/global-saving-glut-monetary-policy-and-housing-bubble-further-evidence/)), partly because of their voracious reserve accumulation policies, a core element in the export-led Chinese development strategy. Thus, a more rebalanced global economy might be good for the world economy as a whole, decreasing the likelihood of another recession.


---

### Answer by username_3 on 2017-06-10. Score: 0

Some economists argue that China should head towards a consumption-led and especially a productivity-led growth because their investment-led growth is not sustainable (as you stated), at least not in the long run. China already relies heavily on exports, plus they produce more than the rest of the world can consume which obviously leads to certain difficulties in the future.

Although China's growth in the last quarter of a century has been impressive, some experts assert that China's growth rate could be much higher if the resources would be used more efficiently. This inefficiency is - according to them - due to the enormous investment projects that China has carried out. In addition, China's workforce will shrink in the future which makes relying heavily on investments more difficult to achieve.

I hope my explanation is helping, I know it is far from the only way to look at China's economic growth.

> **Comments:**
> **username_0**: [re: inefficient investment projects] I know their state owned enterprises are not efficient and propped up. But that does not seem to be a pitfall of investment-led growth in general: that's a criticism of what, specifically, China invested in. Or is the idea that allocating resources to investment will always be less efficient if you are monomaniacial about it?  
> **username_3**: It is dangerous because they can hardly keep up the investment-led growth (on its current level) in light of their demographic situation _and_ because they highly depend foreign demand. Because of that, many experts point to the inefficiency in the state-owned enterprises. If the owner of these firms (i.e. the Communist party) manages to make these firms productive (e.g. by privatizing them), China would not have to rely as much on investments as they do now.  

---

