Opening up domestic sectors to competition would also help enhance productivity in the service sector. Indeed, resource allocation becomes increasingly challenging as the economy matures and its structure becomes more complex, a stage now reached by China. One possible measure of efficiency in resource allocation is the contribution of current and past investment (capital stock) to current GDP growth. According to this measure, we note that the marginal contribution from investment to GDP growth has been falling gradually and by 2016, based on the long-term trend, a 1 percentage point increase in investment is expected to contribute only 0.75 percentage point to GDP growth.
Another issue related to low consumption share to GDP has to do with growing income disparity. Beneath the rapid economic growth, consumption gaps between rural and urban households, and between the rich and the poor, have been widening. The consumption expenditure of the "lowest income group" (according to the household survey definition) now accounts for less than 20 percent of the "high and highest income group", down from more than 40 percent in the early 1990s.
Similarly, consumption expenditure per capita of rural households relative to those of urban households has fallen from 70 percent to a low of 50 percent in recent years. This reflects an even faster decline in income share. Since the rich tend to spend less, the growing income share of the rich has inevitably led to a fall in the consumption share of GDP.
Finally, it is expensive to maintain a high ratio of investment to income. During most of its peak growth period, China supported investment with its own savings. Households and the corporate sector each accounted for about 40 percent of national savings, and the government for the rest. The large savings by the corporate sector is attributed to a de facto financial transfer from households to corporate through the low interest rate structure that provided cheap capital. Although households also benefited from rapid economic growth, which in turn was attributable to large corporate sector investment, a larger share of the growth dividend went to the corporate sector through this channel.
Furthermore, the surge in investment after 2008 to counter the negative impact of global slowdown relied largely on monetary stimulus. The total social financing doubled from 6.8 trillion yuan ($1.07 trillion) in 2008 to 14.1 trillion yuan in 2009. While credit growth has been curtailed since then, the economy still has a liquidity overhang, albeit at a lower velocity. Liquidity growth beyond the productive capacity growth of the economy tends to inflate asset prices, which, in turn, attracts investment to reap capital gains. The property market boom during 2010-11 is a case in point.
The points above support the current government's prudent position. But that does not mean policies should be limited to fine tuning irrespective of changing circumstances. For instance, should the global environment deteriorate substantially over the course of the year, a clearly defined stimulus package through the budget could address both the concerns noted above and provide adequate defense against the negative spillover. Such a package could include policies that would continue to strengthen the social safety net, reduce social security contributions that could be supplemented by larger dividend transfer from State-owned enterprises, increase infrastructure investment in rural areas where employment effect could be larger, and beef up social housing program that could also help the property market. After all, China still has the fiscal space to do so.