To look clearly at the root of the issue, and to see why the dominant trend in China is (inflationary) undercapacity, as Yu Song and Helen Qiao rightly emphasize, it is necessary to look at the overall situation – i.e. at the macro-economy. This will show why the detailed data released on economic growth in 2009 indicate China is relatively well placed to deal with inflation in 2010. The issues may appear technical but they are in fact vital for assessing China's overall economic situation.

China cannot increase capacity by simply increasing its efficiency of investment. Contrary to myths, presumably spread by those who have not examined the figures, numerous studies show that China's use of investment is highly efficient in terms of international comparisons. The most accurate studies on this are those on the overall growth of efficiency of the economy – technically known as total factor productivity. These show high rates of total factor productivity growth in China. Calculating China's investment to GDP growth ratio – how much China has to invest for its economy to grow by 1 percent – also clearly shows the same situation.

Taking a five year average, to smooth out purely short term fluctuations, China has had to utilize 3.7 percent of GDP for fixed investment for its economy to grow by 1 percent. China's efficiency of investment, from the viewpoint of GDP growth, is more than twice that of the U.S. – which over the same period had to invest 7.8 percent of GDP to grow by 1 percent.

To give detailed figures, in the five years to 2008, the latest for which there is full data, China's GDP grew at an average annual 10.8 percent, and it invested an average of 40.7 percent of GDP – yielding the 3.7 percent of GDP in fixed investment correlation with 1 percent GDP growth.

Interestingly, China's efficiency in the use of investment is almost exactly the same as India's. Over the same period, India's economy grew an average 8.5 percent a year and its share of fixed investment in GDP was 31.0 percent – i.e. India also invested 3.7 percent of GDP to grow by 1 percent.

Historical examination shows both China and India are among the most efficient sustained users of investment in post-World War II history – with a record far better than the U.S., Europe or Japan at present. China and India grow so fast because they have very high rates of investment and that investment is used very efficiently.

For present purposes, however, the significance of this is that China and India have little scope for increasing or sustaining their growth rates, or increasing their capacity, by achieving efficiencies in capital use. Both countries are already up against the boundary of what any country has achieved in a sustained way since World War II. Their growth rates can therefore only be maintained or increased by maintaining or increasing the allocation of GDP to investment.

Fortunately from the point of view of containing inflationary pressure, the detailed figures for China's 2009 GDP growth show that the boost in its domestic demand did not come from increased consumption alone. Consumption, by definition, does not add to supply or capacity but it does increase demand – which means it is inflationary. In 2009, however, the increase in China's domestic demand came not only from consumption but from increased investment – which added to efficiency and capacity. The resulting increase in capacity – that is supply – as it comes on stream puts China in a better position to contain inflation.

To look at the details, new data show that China's imports rose more rapidly than exports in 2009. This fall in exports relative to imports deducted 3.9 percent from China's GDP growth. However, the beneficial side of this was that since imports are an addition to supply, their relative increase had an anti-inflationary effect – in addition to lowering China's trade surplus.

China's domestic consumption contributed 4.6 percent of GDP growth while domestic investment contributed 8.0 percent. The two added together mean China's domestic demand increased by 12.6 percent in 2009 – one of the highest increases in world history. But it also meant that the process of expanding China's efficiency and capacity began during the year, and as this capacity increase comes on stream its overall effect will be anti-inflationary.

This is why China was right to ignore the claims it was "overinvesting" in 2009. On the contrary, the extra and more efficient-capacity that will come on stream will help contain inflation in 2010 whereas if China had not carried out this investment it would face even greater capacity constraints. If a policy of stimulating the economy only through consumption had been pursued, as some foreign commentators urged, the capacity constraints facing China today would be greater and therefore the inflationary risks higher.

The Chinese authorities are therefore correct to have insisted on a balanced development of consumption, investment and trade. The 2009 stimulus package, which increased domestic demand via both consumption and investment, has left China better placed to confront inflationary pressures in 2010. Very strong stimulation of both domestic consumption and domestic investment in 2009 made it possible to overcome deflation and recession. Provided that balanced development of consumption, investment and trade continues to take place in 2010 it should be possible to contain inflationary risks.

John Ross is Visiting Professor at Antai College, Shanghai Jiao Tong University. From 2000 to 2008 he was Director of Economic and Business Policy in the administration of the Mayor of London Ken Livingstone, a post equivalent to the current position of Deputy Mayor. He was previously an adviser to major international mining, finance and equipment manufacturing companies.