This trend is considered the clearest sign that China’s growth process is unbalanced, with consumption repressed and investment overdone.

But this perception is wrong. China’s high investment rates have successfully expanded a very low initial capital stock, and this has enabled China to sustain an extremely high GDP growth rate for three decades. The accompanying decline in consumption as a share of GDP should not cause concern as it is helping to lay the foundation for future prosperity and typical of other East Asian industrialising economies. China’s consumption share will rise as its economy matures, and it is most likely already higher than generally supposed.

Nobel laureate Edmund Phelps’s ‘golden rule of capital accumulation’ states that a country should invest and consume so that children experience the same improvement in living standards as their parents did. According to Phelps’s golden rule the optimal investment rate for an economy depends on the size of its capital stock relative to the economy and the productivity of investment.

Applied to China, the golden rule suggests that the policy objective should not be to maximise present-day consumption (or its share of the economy), but to maximise growth in consumption over time. By coincidence or design, China’s consumption pattern has followed this golden rule for most of the post-Mao reform era.

As per Phelps’s golden rule China’s consumption share declined during its industrialisation phase, at the time the country was building up its depleted capital stock. But as China’s economy opened up, the investment share increased from 30 per cent of GDP in the early 1980s to over 40 per cent by the turn of the millennium, and surged above 45 per cent with the 2008 stimulus program. Steadily rising investment levels helped create the capital base necessary to achieve GDP growth averaging 10 per cent over the last three decades, despite several global financial shocks.

Despite rapid growth of investment, the productivity of capital has also remained high. A key explanation for this is the size of the capital stock relative to GDP — a measure of whether a country has been over- or under-investing. For example, China’s capital stock relative to its economy has been about 40 percent less than other middle income East Asian countries because of its Mao era deprivations.

Estimates of China’s ‘total factor productivity’, a measure of productivity and efficiency in the use of labour and capital, place China among the world’s strongest performers. This is corroborated by industrial profits as a share of GDP, which rose from 2 per cent in 1998 to 12 per cent in 2010.

Finally, China’s actual consumption as a share of GDP may in fact be higher than the official numbers suggest. China’s National Bureau of Statistics has cautioned that its household consumption figures do not fully take into account cash and in-kind transactions — nor do they adequately capture the value of owner-occupied housing. The last revision of the national accounts in 2004 increased the share of services by an astounding 30 per cent. Moreover, household income is significantly under-reported. In May 2012 The Economist reported that China’s share of consumption may be underestimated, perhaps by as much as 5-10 percentage points of GDP.

This is not only a matter of inaccurate data: consumption in China is also growing rapidly. Over the last two decades, household consumption has steadily increased by more than 8 per cent annually — the highest sustained rate for any major economy. The share in GDP has been declining as GDP growth has averaged 10 per cent.

Looking forward, most long-term projections show that in the next two decades China’s GDP growth rate is likely to decline gradually to 6-7 per cent. With a renewed capital stock and a steady increase in the share of household income to GDP (as occurred in the other East Asian economies), consumption can continue to grow at its golden rule rate of 8 per cent for decades to come. So, Beijing can be more relaxed in shifting to a slower but higher-quality growth path.

This is the context China’s policy makers face as they consider another stimulus program. There is recognition that the largely credit-financed and investment-focused 2008 program was excessive, and that it resulted in unnecessary waste and an overheated property market. Some acceleration of vetted investment projects is sensible, but emphasis should now be given to structural reforms that will encourage efficient growth, including increased fiscal resources for social services, an area where China continues to underperform. These structural reforms are consistent with China maintaining its golden rule consumption path.

Yukon Huang is Senior Associate at the Asia Program, Carnegie Endowment for International Peace, and a former country director at the World Bank in China.

A version of this article was first published here by the Carnegie Endowment for International Peace.