Rebalance 'less important' than innovation

China's economy needs a new source of momentum, not a rebalancing as so many analysts claim, senior economists at Peking University said.

After the 2008 global crisis, when the government launched a stimulus package of 4 trillion yuan ($666 billion), critics of China's dependence on exports pointed to the nation's weak consumption and reliance on investment-driven growth.

Two consistent views on China have developed overseas, both based on the idea of imbalances.

On the one hand, there are commentators such as New York Times columnist Paul Krugman, representative of the pessimists. He has argued that the Chinese economy will eventually crash, and all the Chinese government can do is determine the intensity of the crash.

On the other hand are such analysts as Steven Roach of Yale University, who is optimistic about the future of the Chinese economy. He has admitted there are imbalances, but these, he said, are being addressed quickly.

But neither the pessimists nor the optimists question the economic data on which they base their arguments. Some domestic experts believe that the statistics themselves are misleading.

Cai Hongbin, dean of the Guanghua School of Management at Peking University, said that Chinese consumption has long been seriously underestimated.

In the United States, consumption in housing accounts for 20 percent of total domestic consumption and 14 percent of US GDP. In the US, aside from actual rent paid for housing by tenants, the annual imputed rent of homeowners is counted in personal consumption expenditures.

Imputed rent is what statisticians calculate that owner-occupants would have spent had they been renting, and in the US, it's considered to be equivalent to 5 to 10 percent of housing values. In China, consumption in housing accounts only for 8 percent of total domestic consumption and 3 percent of GDP.

But in China, most actual rent payments aren't included in the national accounts. And the imputed rent of home - owners, who make up 80 percent of the Chinese population, is calculated at just 2 percent of historic prices, which were extremely low before the real estate bubble developed in 2008.

Cai also thinks China's service sector is seriously underestimated. In developed countries, services comprise more than 70 percent of the national economy. But the figure is only 45 percent in China. This contrast is often used to highlight the imbalance of China's economic structure.

But again, it's different in China. For example, many important types of consumption, such as the medical care provided in public hospitals, are government-controlled, and prices are kept low.

"China's consumption is equivalent to 55 percent of GDP, if these omitted factors are included," said Cai. "And investment is seriously overestimated."

When all provincial-level GDP figures are added up, the sum customarily exceeds the national total, because many local governments inflate their figures, and some investments, accounting for nearly 60 percent of China's GDP, are being counted more than once. "Depreciation of investment and the price deflator in China are both understated," Cai noted.

Depreciation measures the decline in the value of tangible assets, while a price deflator takes account of inflation.

"Investment's real share in China's GDP should be about 10 percentage points lower than the current 47 percent."

So, the ratio between consumption of 55 percent of GDP and investment of 37 percent of GDP will be in a reasonable range, similar to what was seen in Japan and South Korea from the 1960s to the 1970s.

"There are no ready theories in economics telling us what the optimal ratio is, and it is unrealistic to compare the ratios in China and in the US," said Cai.

"Analysts should know the stories behind the statistics before arriving at any conclusions about the Chinese economy."

Statistical problems regarding investment in China lie in both quantity and quality. Decelerating investment growth in some new projects shouldn't be interpreted as a sign that China is succeeding at transforming its economic growth model. Rather, it's a warning to the nation - similar to a lack of business confidence - about the urgency of creating a sound market for quality investments.

Liu Qiao, a finance professor at Peking University, noted: "Government debt is a cause of the decline of investment.

"To improve the quality of investment, the government must change its ways of raising funds, boost investment efficiency and reduce intervention in the market."

At the same time, Cai said it's "more dangerous to stimulate Chinese people's consumption through artificial means, rather than promoting investment intentionally, as some recent crises were caused by excessive consumption."

Innovation, he said, should be the real engine of the economy, instead of investment, consumption and exports.

Chen Yuyu, a professor of applied economics at Peking University, said: "Investment should focus on creating jobs, at least 20 million each year, in the 100 biggest cities in China in the next five years."

For sustainable growth, investment should go into the real economy, especially the private economy, service sector and public services.

The government needs to remove barriers to capital flows through reform, which will mean greater efficiency, Chen said.