China's rebalancing requires more investment of the right kind For nearly a decade there has been almost unanimous consensus among economists and even senior Communist party officials that China needs to transform what Beijing calls its "unbalanced, uncoordinated and unsustainable" growth model. The simple prescription for what ails the world's second-largest economy has been a big dose of household consumption and a cutback on its supposedly unhealthy penchant for investment. Household consumption makes up only around 35 per cent of China's overall gross domestic product, about half the level of developed countries like the US, while investment accounts for about half of GDP, an extraordinarily high level even for developing countries. The party's current five-year plan, which covers 2011 to 2015, made this rebalancing a top priority but, after a couple of hopeful years of slightly higher consumption and slightly lower investment, figures released this week show the trend has gone into reverse. Consumption accounted for 50 per cent of GDP growth in 2013 while investment accounted for 54.4 per cent of growth, meaning investment rose faster than consumption and increased its overall share of the economy last year. The rounding error came from net exports making a negative contribution to growth. This apparent setback in China's transformation to a more balanced economy has prompted predictable hand-wringing from many economists and embarrassed silence from officials. But what if all those people who have been offering the simple formula - more consumption and less investment - have got it wrong? In fact, a growing number of economists are questioning what has become virtual orthodoxy when assessing China's economy. They now say the country still needs continued high levels of investment for many years to come - it just needs to channel that investment into different things. What China does not need is more forests of empty apartment blocks dotting the hinterland, or airports in the middle of nowhere that never get used, or luxury government office blocks built as replicas of the Capitol dome or the Parthenon. These vanity projects and the outdated, polluting steel mills and cement factories used to build them are exactly the kind of investment that has driven China's economy over the last decade. In the past five years that investment has increasingly been paid for with credit, even though much of it will turn out to be unproductive and many of those loans will end up as non-performing dead weight in the rickety Chinese financial system. To work out what the Chinese economy needs to invest in more one only has to spend a few days in Beijing or any other major city and listen to the things that ordinary people complain about. There is enormous demand for better public transport, cleaner energy, environmental protection, industrial upgrading and other investments that can clean up the air and alleviate terrible gridlock on the roads. Perhaps most pressing of all is the need for investment in services like healthcare. While Chinese heavy industry is awash in overinvestment and underutilised capacity there is no overcapacity in the services sector in China, except perhaps in state propaganda. There are also a couple of points that often get overlooked in the midst of this debate. The first is the fact that although consumption's share of GDP in China has fallen in recent years, per capita consumption has actually been growing by around 8 per cent annually - the highest rate of any major economy. The second point is that if investment were to slow drastically or decline then consumption would also drop thanks to a decline in employment and wage growth. Imbalances are not the problem. The problem is to make sure you invest in the right things Yukon Huang As Yukon Huang, a former World Bank country director for China, says: "Imbalances are not the problem. The problem is to make sure you invest in the right things. A focus on investment in services and environmental sustainability would also help to address a major flaw in the argument that China needs to transform into an economy dominated by the consumption of goods. "The world cannot afford for China to become a mass consumer society, it's incompatible with resource constraints and it's an equation that doesn't work," says Leslie Young, a professor of economics at Cheung Kong Graduate School of Business. Unfortunately, the creation of a mass consumer society has been seen in the past by the government as its best way to maintain legitimacy and social stability.