On The Misjudgment Of China 's Investment And Consumption Structure And Its Amendment

Recently the "miracle of China" has attracted lots of attention around the world on China’s economic growth. The most popular view is the "Three Carriages" theory, and as the most important parts of China’s internal economy, investment and consumption have received broad attention from various sectors and the academic field. At present most people think that the structure of China’s investment and consumption has been imbalanced seriously, facing the problem of excessive investment and insufficient consumption. This paper analyzes this perspective through statistical data, economic growth theories and empirical tests, finding that there exist some misunderstandings about the structural problem of investment and consumption from several aspects. This paper mainly aims at amending these misunderstandings and discusses the main methods to solve this structural problem.The first misunderstanding is that the investment rate in China is too high while the consumption rate is too low. The paper analyzes these two ratios and relative data published by "China Statistical Yearbook". After amending the official statistical data from1995to2011, the paper finds out that the current statistical gross capital formation has been over estimated while the final consumption expenditure has been underestimated seriously, which results in the over estimation of investment rate and underestimation of consumption rate, causing people to regard structural imbalances of China’s investment and consumption as a very serious problem. After being amended, the two ratios of China both fluctuate within reasonable scales, and the gap between them is decreasing very slowly. The contribution rate of consumption for economic growth has been always higher than that of investment rate, showing that China’s domestic consumption is not as weak as we’ve imagined, and the statement about overheated investment in China is also a popular mistake.The second misunderstanding is that consumption is much more important than investment as for the economic growth. The paper introduces the typical Ramsey model to analyze the effect of investment and consumption on economic growth. After analyzing the optimal behavior of households’inter-temporal consumption and enterprises’production, the paper finds out that the consumption has much more effect on economic growth than investment in short term. Increasing current consumption will decrease the steady state level of economic growth, capital and consumption, speeding up the convergence of economy to the steady state. Relatively, the return of capital formation cannot be received immediately, resulting in limited positive impact on economic growth. However, in the long run, the investment which is transformed from deposit has very strong and positive spillover effects on other product factors. The statement on stimulating consumption is limited within the short term, thus we cannot ignore the importance of investment if we want to keep the economic growth sustainable.The third misunderstanding is that investment and consumption are important "carriages" for driving China’s economic growth. The paper uses the time series data from1970to2011published by "China Statistical Yearbook" to take several empirical tests through OLS model, ADF unit root tests, VAR model, impulse response function, variance decompose analysis and Granger causality tests. The empirical tests show us that investment and consumption would not necessarily stimulate the economic growth, since they are the results of the economic growth instead of the reason. These tests show that there exists strong "crowding out" effect between investment and consumption, which recedes their effect on economic growth. Thus optimizing the structure of them and setting up an optimum transmission mechanism between them is the basic solution to solve China’s structural imbalance problem.The last misunderstanding is that the government should pay more attention to decreasing the investment rate while raising the consumption rate. The results of amending statistical data and taking empirical tests tell us that the basic way to solve China’s structural problem is not to change the ratio of investment and consumption to GDP, but to optimize the structure of themselves, and push the process of upgrading industrial structure in China. We should set up an optimum transmission mechanism between consumption and investment to develop their largest effect on keeping China’s economic growth sustainable, healthy and faster.