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Why does China invest so much?

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  • John Knight
  • Sai Ding

Abstract

China has had a remarkably high ratio of investment to output throughout the period of economic reform, surpassing almost all other economies, whether developed or developing.� The high investment rate is in turn an important proximate determinant of China's high rate of economic growth.� This survey paper gathers together the available evidence to explain why investment is so high.� It considers factors both on the demand and on the supply side, and in the latter case the availability both of resources and of funds.� It analyses the rate of return on capital and its movement over time, and the factors which have kept it up.� It draws on the literature to explain the high saving rate, and considers why the imperfect capital market and institutional deficiencies have not constrained investment.� The state-owned and the private sectors are treated separately on account of their different objectives and behaviour and their differential access to funds.

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Bibliographic Info

Paper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number 441.

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Date of creation: 01 Jul 2009
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Handle: RePEc:oxf:wpaper:441

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Keywords: China; Financial market; Credit constraint; Investment; Rate of profit; Saving;

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  1. Shang-Jin Wei & Xiaobo Zhang, 2009. "The Competitive Saving Motive: Evidence from Rising Sex Ratios and Savings Rates in China," NBER Working Papers 15093, National Bureau of Economic Research, Inc.
  2. Ding, Sai & Knight, John, 2009. "Why has China Grown so Fast? The Role of Structural Change," Proceedings of the German Development Economics Conference, Frankfurt a.M. 2009 7, Verein für Socialpolitik, Research Committee Development Economics.
  3. Knight, John & Song, Lina, 1999. "The Rural-Urban Divide: Economic Disparities and Interactions in China," OUP Catalogue, Oxford University Press, number 9780198293309, September.
  4. King, Robert G & Levine, Ross, 1993. "Finance and Growth: Schumpeter Might Be Right," The Quarterly Journal of Economics, MIT Press, vol. 108(3), pages 717-37, August.
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  6. Cull, Robert & Xu, Lixin Colin, 2005. "Institutions, ownership, and finance: the determinants of profit reinvestment among Chinese firms," Journal of Financial Economics, Elsevier, vol. 77(1), pages 117-146, July.
  7. Loren Brandt & Xiaodong Zhu, 2000. "Redistribution in a Decentralized Economy: Growth and Inflation in China under Reform," Journal of Political Economy, University of Chicago Press, vol. 108(2), pages 422-451, April.
  8. de la Grandville,Olivier, 2009. "Economic Growth," Cambridge Books, Cambridge University Press, number 9780521725200, April.
  9. Zou, Heng-fu, 1991. "Socialist economic growth and political investment cycles," Policy Research Working Paper Series 615, The World Bank.
  10. Chamon, Marcos & Prasad, Eswar, 2007. "Why Are Saving Rates of Urban Households in China Rising?," IZA Discussion Papers 3191, Institute for the Study of Labor (IZA).
  11. de la Grandville,Olivier, 2009. "Economic Growth," Cambridge Books, Cambridge University Press, number 9780521898010, April.
  12. Sai Ding & John Knight, 2008. "Why has China Grown So Fast? The Role of Physical and Human Capital Formation," Economics Series Working Papers 414, University of Oxford, Department of Economics.
  13. Cull, Robert & Xu, Lixin Colin & Zhu, Tian, 2009. "Formal finance and trade credit during China's transition," Journal of Financial Intermediation, Elsevier, vol. 18(2), pages 173-192, April.
  14. Jeffrey Wurgler, 1999. "Financial Markets And The Allocation Of Capital," Yale School of Management Working Papers ysm123, Yale School of Management, revised 01 Mar 2001.
  15. Sean Dougherty & Richard Herd, 2005. "Fast-Falling Barriers and Growing Concentration: The Emergence of a Private Economy in China," OECD Economics Department Working Papers 471, OECD Publishing.
  16. Paul De Grauwe, 2008. "Animal Spirits and Monetary Policy," CESifo Working Paper Series 2418, CESifo Group Munich.
  17. Chong-En Bai & Chang-Tai Hsieh & Yingyi Qian, 2006. "The Return to Capital in China," NBER Working Papers 12755, National Bureau of Economic Research, Inc.
  18. Knight, John, 1995. "Price Scissors and Intersectoral Resource Transfers: Who Paid for Industrialization in China?," Oxford Economic Papers, Oxford University Press, vol. 47(1), pages 117-35, January.
  19. Guariglia, Alessandra & Poncet, Sandra, 2008. "Could financial distortions be no impediment to economic growth after all? Evidence from China," Journal of Comparative Economics, Elsevier, vol. 36(4), pages 633-657, December.
  20. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-29, May.
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  22. Ding, Sai & Knight, John, 2009. "Can the augmented Solow model explain China's remarkable economic growth? A cross-country panel data analysis," Journal of Comparative Economics, Elsevier, vol. 37(3), pages 432-452, September.
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Cited by:
  1. Sai Ding & Alessandra Guariglia & John Knight, . "Does China overinvest? Evidence from a panel of Chinese firms," Discussion Papers 12/04, University of Nottingham, GEP.
  2. John Knight & Wei Wang, 2011. "China’s Macroeconomic Imbalances: Causes and Consequences," The World Economy, Wiley Blackwell, vol. 34(9), pages 1476-1506, 09.
  3. Sai Ding & Alessandra Guariglia & John Knight, 2010. "Negative investment in China: financing constraints and restructuring versus growth," Working Papers 2010_31, Business School - Economics, University of Glasgow.
  4. Ding Lu, 2011. "Transition of China’s growth pattern," Frontiers of Economics in China, Springer, vol. 6(4), pages 535-555, December.
  5. Guonan Ma & Robert McCauley & Lillie Lam, 2013. "The Roles of Saving, Investment and the Renminbi in Rebalancing the Chinese Economy," Review of International Economics, Wiley Blackwell, vol. 21(1), pages 72-84, 02.

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