China's long-term plan to cut reliance on investment as a growth engine is clashing with its short-term need for protection against a worsening global outlook.
Beijing has made it clear that consumption, not investment, must eventually do more of the work to drive the world's No. 2 economy.
But with debt troubles in the United States and Europe casting doubt on worldwide demand, it's likely China will keep investing by the billions for now, even if that takes Beijing further from its ultimate goal.
Chinese consumers are a long way from becoming big spenders, so massive investment is still the fastest and easiest way for China to prop up its economy if push comes to shove.
"China's investment carriage continues to race along," the China Securities Journal, an official Chinese paper, said in a front-page story on Monday. "Our investment-led growth model will not falter in the short term."
Data published on Tuesday underscored expectations that China's investment will keep growing at a healthy clip in months ahead. It showed that China pulled in $69.2 billion of foreign investment direct in the first seven months of this year, which is 19 percent above a year ago, and putting the country on track for another year of record foreign direct investment.
Without doubt, having heavy investment carries a price. Analysts say it generates waste and excess capacity, fuels inflation and produces diminishing economic returns. State investment is like an unsustainable life-support system that China needs to wean itself off.
In 2009 -- the last year for which figures are available -- investment made up 65 percent of China's gross domestic product, a far higher share than in other major or Asian economies. Household consumption, however, accounted for just 35 percent, compared with 70 percent in the United States.
Unstable, unbalanced, uncoordinated
In the words of China Premier Wen Jiabao, the Chinese growth model is on all counts unstable, unbalanced, uncoordinated and ultimately unsustainable.
Some of the more bearish economists argue that wasteful investment is inflating a property price bubble and saddling banks with bad loans, sowing the seeds of a future crisis.
An example of healthier investment, economists say, would be companies stepping up capital expenditures on improving China's manufacturing technologies.
Yet, the prospect that a downturn in the US and Europe -- China's top two export markets -- could wipe out millions of Chinese factory jobs and endangering Beijing's leadership is politically unpalatable.
So, if the global outlook deteriorates, China may decide that investment is the lesser of two evils, much like it did after the 2008 financial crisis when it ordered an investment binge that helped it maintain annual growth rates of around 10 percent during and after the global recession.
"It is possible that China's investment-led growth can continue for several years longer," said Mark Williams, an economist at Capital Economics in London. "There is no sign yet that it is about to implode."
In spite of global clouds, most economists still expect China to grow well above 8 percent in 2012. That is in line with the market refrain that China won't have a hard landing. A Reuters poll in mid-July showed economists think 2012 growth will be 8.8 percent, well above Beijing's 7 percent growth target.
Rebalancing, some day
On the surface, China seems serious about following through on promises to invest less to rebalance its economy, and it has good reasons to be wary of repeating its 2008 spending spree.
Some of the 4 trillion yuan ($626 billion) stimulus package announced in 2008 was squandered on ill-advised projects and economists now worry that a sizable fraction of loans to local governments won't be repaid.
Banks may be wary of extending more large loans, making it difficult for local governments to invest their way to growth in the future.
Last week alone, China halted new railway projects and cut its building target for public housing by 20 percent to 8 million units for 2012, from 10 million.
Yet, economists say little has changed in reality.
China's bullet trains may be a beguiling metaphor for its rapid urbanization, but rail investment accounted for just a paltry 1.9 percent of total fixed asset investment in the first six months of this year.
That China will stop making bullet trains says less about its desire to cut investment, and more about its need to pacify public wrath over a fatal train accident in eastern China last month, said Dong Tao, an economist at Credit Suisse.
Likewise, the cut-back in public housing is simply a realistic revision of an overly-ambitious plan and should not affect actual construction work, Tao said.
"The cut isn't even relevant," he said. "The 10 million a year target was too aggressive this year. It certainly would be too aggressive next year and the year after."
If anything, some economists argue Beijing is most likely to increase investment in housing if it decides to stimulate growth in coming months.
Homes priced out of reach
Soaring property prices have put homes out of reach for many ordinary Chinese, and that has become a source of public ire. Keenly aware of that, Beijing wants to build more public homes to keep them affordable.
And with the real estate market accounting for a quarter of total investment in the first half of this year, China could get decent bang for its buck if it ramps up spending in the sector.
Judging by Beijing's recent remarks on monetary policy, it appears that China is ready to pause its 10-month policy tightening campaign as rain clouds gather over the world economy.
Alongside wide expectations that China's inflation is near its peak after hitting a three-year high of 6.5 percent in July, many analysts think Beijing is ready to support economic growth if needed.
"With the problems in Europe, the government won't be tightening credit as much as in the first-half of the year," said Paul Cavey, an economist at Macquarie, adding that Beijing's policy easing should lower China's interbank rates.
To be sure, Beijing says it wants to cure China of its penchant for investment-driven growth. Under its broad five-year economic plan starting from 2011, it envisions a fairer Chinese economy where consumption climbs on rising incomes.
But the grand plan drew skepticism when it was unveiled as it was short on details on how changes would come about.
Few big spenders
Many analysts have said that Chinese consumers cannot pull their weight as big spenders because the bulk of national income goes to the state instead of workers. A flimsy social safety net encourages high saving rates.
For younger workers, consumption tends to be higher, but between expensive housing and strong cultural pressure to support aging parents and grandparents, they too face limits on how much they can spend.
In a paper published last month, the International Monetary Fund outlined key reforms China should implement to empower its consumers.
It called for a liberalization of financial markets; a reduction in personal income taxes; better healthcare services, increasing the cost of land, energy and pollution; raising dividend payouts from state firms, and improving labor mobility.
However, it would be years before these reforms take effect.
"It's too early to expect consumption to play a particularly important role," said Macquarie's Cavey. "For the time being, if China wants rapid rates of growth, it's still going to be investment-led growth."