IDEAS home Printed from https://ideas.repec.org/a/eee/asieco/v49y2017icp12-25.html
   My bibliography  Save this article

China's investment and rate of return on capital revisited

Author

Listed:
  • Tang, Ya
  • Xu, Jianguo
  • Zhang, Xun

Abstract

We revisit China's suspected overinvestment problem by examining the rate of return on capital from two perspectives. First, we find that two existing methods of estimating the rate of return generate conflicting results, and we succeed in reconciling them. Our revised estimates show that the rate of return rose sharply from 1998 to 2014, which helps explain the strong investment drive. Second, we explore what caused the rate of return to rise. We find the explanation lies mainly with the long-term factor of rising total factor productivity but that the short-term cyclical factor of low real interest rates has also contributed.

Suggested Citation

  • Tang, Ya & Xu, Jianguo & Zhang, Xun, 2017. "China's investment and rate of return on capital revisited," Journal of Asian Economics, Elsevier, vol. 49(C), pages 12-25.
    • Handle: RePEc:eee:asieco:v:49:y:2017:i:c:p:12-25
    DOI: 10.1016/j.asieco.2017.02.003
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S1049007817300428
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.asieco.2017.02.003?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Gramlich, Edward M, 1994. "Infrastructure Investment: A Review Essay," Journal of Economic Literature, American Economic Association, vol. 32(3), pages 1176-1196, September.
    2. Robert C. Feenstra & Gordon H. Hanson, 2005. "Ownership and Control in Outsourcing to China: Estimating the Property-Rights Theory of the Firm," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 120(2), pages 729-761.
    3. Diego Moccero, 2008. "Improving the Business and Investment Climate in Indonesia," OECD Economics Department Working Papers 638, OECD Publishing.
    4. Rajan, Raghuram G & Zingales, Luigi, 1998. "Financial Dependence and Growth," American Economic Review, American Economic Association, vol. 88(3), pages 559-586, June.
    5. Gomme, Paul & Greenwood, Jeremy, 1995. "On the cyclical allocation of risk," Journal of Economic Dynamics and Control, Elsevier, vol. 19(1-2), pages 91-124.
    6. Du, Julan & Fang, Hongsheng & Jin, Xiangrong, 2014. "The “growth-first strategy” and the imbalance between consumption and investment in China," China Economic Review, Elsevier, vol. 31(C), pages 441-458.
    7. Morris Goldstein & Nicholas R. Lardy, 2004. "What Kind of Landing for the Chinese Economy?," Policy Briefs PB04-07, Peterson Institute for International Economics.
    8. César Calderón & Luis Servén, 2004. "The Effects of Infrastructure Development on Growth and Income Distribution," Working Papers Central Bank of Chile 270, Central Bank of Chile.
    9. Easterly, William & Rebelo, Sergio, 1993. "Fiscal policy and economic growth: An empirical investigation," Journal of Monetary Economics, Elsevier, vol. 32(3), pages 417-458, December.
    10. repec:fip:fedgsq:y:2005:i:mar10 is not listed on IDEAS
    11. Mr. Il Houng Lee & Mr. Murtaza H Syed & Mr. Liu Xueyan, 2012. "Is China Over-Investing and Does it Matter?," IMF Working Papers 2012/277, International Monetary Fund.
    12. Andrew Young, 2004. "Labor's Share Fluctuations, Biased Technical Change, and the Business Cycle," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 7(4), pages 916-931, October.
    13. Olley, G Steven & Pakes, Ariel, 1996. "The Dynamics of Productivity in the Telecommunications Equipment Industry," Econometrica, Econometric Society, vol. 64(6), pages 1263-1297, November.
    14. Chang-Tai Hsieh & Peter J. Klenow, 2009. "Misallocation and Manufacturing TFP in China and India," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 124(4), pages 1403-1448.
    15. Robert G. King & Ross Levine, 1993. "Finance and Growth: Schumpeter Might Be Right," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 108(3), pages 717-737.
    16. Ms. Nan Geng & Mr. Papa M N'Diaye, 2012. "Determinants of Corporate Investment in China: Evidence From Cross-Country Firm Level Data," IMF Working Papers 2012/080, International Monetary Fund.
    17. Zheng Song & Kjetil Storesletten & Fabrizio Zilibotti, 2011. "Growing Like China," American Economic Review, American Economic Association, vol. 101(1), pages 196-233, February.
    18. Chong-En Bai & Chang-Tai Hsieh & Yingyi Qian, 2006. "The Return to Capital in China," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 37(2), pages 61-102.
    19. Loren Brandt & Trevor Tombe & Xiadong Zhu, 2013. "Factor Market Distortions Across Time, Space, and Sectors in China," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 16(1), pages 39-58, January.
    20. Grier, Kevin B. & Tullock, Gordon, 1989. "An empirical analysis of cross-national economic growth, 1951-1980," Journal of Monetary Economics, Elsevier, vol. 24(2), pages 259-276, September.
    21. Loren Brandt & Trevor Tombe & Xiadong Zhu, 2013. "Factor Market Distortions Across Time, Space, and Sectors in China," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 16(1), pages 39-58, January.
    22. Arellano, Manuel & Bover, Olympia, 1995. "Another look at the instrumental variable estimation of error-components models," Journal of Econometrics, Elsevier, vol. 68(1), pages 29-51, July.
    23. Luis Serven & César Calderon, 2004. "The Effects of Infrastructure Development on Growth and income," Econometric Society 2004 Latin American Meetings 173, Econometric Society.
    24. Barro, Robert J, 1990. "Government Spending in a Simple Model of Endogenous Growth," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages 103-126, October.
    25. Albert G. Z. Hu & Gary H. Jefferson & Qian Jinchang, 2005. "R&D and Technology Transfer: Firm-Level Evidence from Chinese Industry," The Review of Economics and Statistics, MIT Press, vol. 87(4), pages 780-786, November.
    26. Mr. Steven A Barnett & Mr. R. Brooks, 2006. "What’s Driving Investment in China?," IMF Working Papers 2006/265, International Monetary Fund.
    27. Qin, Duo & Song, Haiyan, 2009. "Sources of investment inefficiency: The case of fixed-asset investment in China," Journal of Development Economics, Elsevier, vol. 90(1), pages 94-105, September.
    28. Dong He & Wenlang Zhang & Jimmy Shek, 2007. "How Efficient Has Been China'S Investment? Empirical Evidence From National And Provincial Data," Pacific Economic Review, Wiley Blackwell, vol. 12(5), pages 597-617, December.
    29. Chen, Anping & Groenewold, Nicolaas, 2013. "Does investment allocation affect the inter-regional output gap in China? A time-series investigation," China Economic Review, Elsevier, vol. 26(C), pages 197-206.
    30. Ben S. Bernanke, 2005. "The global saving glut and the U.S. current account deficit," Speech 77, Board of Governors of the Federal Reserve System (U.S.).
    31. Rawski, Thomas G., 2002. "Will investment behavior constrain China's growth?," China Economic Review, Elsevier, vol. 13(4), pages 361-372, December.
    32. BAI, Chong-En & QIAN, Zhenjie, 2010. "The factor income distribution in China: 1978-2007," China Economic Review, Elsevier, vol. 21(4), pages 650-670, December.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Guo, Shen & Shi, Yingying, 2018. "Infrastructure investment in China: A model of local government choice under land financing," Journal of Asian Economics, Elsevier, vol. 56(C), pages 24-35.
    2. Sun, Hongye & Kim, Giseung, 2021. "The composite impact of ICT industry on lowering carbon intensity: From the perspective of regional heterogeneity," Technology in Society, Elsevier, vol. 66(C).
    3. Wang, Feng & Liu, Xiying & Nguyen, Tue Anh, 2018. "Evaluating the economic impacts and feasibility of China's energy cap: Based on an Analytic General Equilibrium Model," Economic Modelling, Elsevier, vol. 69(C), pages 114-126.
    4. Yulong Luo & Can Wang & Chen Chen & Kangle Ding & Weiliang Zeng, 2021. "Total Investment in Fixed Assets and the Later Stage of Urbanization: A Case Study of Shanghai," Sustainability, MDPI, vol. 13(7), pages 1-29, March.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Yi Huang & Marco Pagano & Ugo Panizza, 2020. "Local Crowding‐Out in China," Journal of Finance, American Finance Association, vol. 75(6), pages 2855-2898, December.
    2. Zhang, Xun & Wan, Guanghua & Luo, Zhi & Wang, Chen, 2019. "Explaining the East Asia miracle: The role of urbanization," Economic Systems, Elsevier, vol. 43(2), pages 1-1.
    3. Chen, Binkai & Lin, Justin Yifu, 2021. "Development strategy, resource misallocation and economic performance," Structural Change and Economic Dynamics, Elsevier, vol. 59(C), pages 612-634.
    4. Suqin Ge & Dennis Tao Yang, 2014. "Changes In China'S Wage Structure," Journal of the European Economic Association, European Economic Association, vol. 12(2), pages 300-336, April.
    5. Cheng Chen & Wei Tian & Miaojie Yu, 2019. "Outward FDI and Domestic Input Distortions: Evidence from Chinese Firms," The Economic Journal, Royal Economic Society, vol. 129(624), pages 3025-3057.
    6. Laiqun Jin & Xiuyan Liu & Sam Hak Kan Tang, 2021. "High-Technology Zones, Misallocation of Resources among Cities and Aggregate Productivity: Evidence from China," Economics Discussion / Working Papers 21-11, The University of Western Australia, Department of Economics.
    7. Jie Bai & Jiahua Liu, 2019. "The Impact of Intranational Trade Barriers on Exports: Evidence from a Nationwide VAT Rebate Reform in China," CID Working Papers 373, Center for International Development at Harvard University.
    8. Sai Ding & John Knight & Xiao Zhang, 2019. "Does China overinvest? Evidence from a panel of Chinese firms," The European Journal of Finance, Taylor & Francis Journals, vol. 25(6), pages 489-507, April.
    9. Chen, Zhao & Poncet, Sandra & Xiong, Ruixiang, 2020. "Local financial development and constraints on domestic private-firm exports: Evidence from city commercial banks in China," Journal of Comparative Economics, Elsevier, vol. 48(1), pages 56-75.
    10. Brandt, Loren & Van Biesebroeck, Johannes & Zhang, Yifan, 2012. "Creative accounting or creative destruction? Firm-level productivity growth in Chinese manufacturing," Journal of Development Economics, Elsevier, vol. 97(2), pages 339-351.
    11. Diego Restuccia & Richard Rogerson, 2017. "The Causes and Costs of Misallocation," Journal of Economic Perspectives, American Economic Association, vol. 31(3), pages 151-174, Summer.
    12. Laiqun Jin & Changwei Mo & Bochao Zhang & Bing Yu, 2018. "What Is the Focus of Structural Reform in China?—Comparison of the Factor Misallocation Degree within the Manufacturing Industry with a Unified Model," Sustainability, MDPI, vol. 10(11), pages 1-19, November.
    13. Zheng Liu & Pengfei Wang & Zhiwei Xu, 2021. "Interest Rate Liberalization and Capital Misallocations," American Economic Journal: Macroeconomics, American Economic Association, vol. 13(2), pages 373-419, April.
    14. Gabriella Berloffa & Eleonora Matteazzi & Alina Şandor & Paola Villa, 2019. "The quality of employment in the early labour market experience of young Europeans," Cambridge Journal of Economics, Cambridge Political Economy Society, vol. 43(6), pages 1549-1575.
    15. Fusheng Xie, 2023. "Productivity Improvement from the Mixed-Ownership Reform: A Financial Frictions Perspective," Sustainability, MDPI, vol. 15(2), pages 1-20, January.
    16. David Autor & David Dorn & Gordon Hanson, 2021. "On the Persistence of the China Shock," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 52(2 (Fall)), pages 381-476.
    17. Marco Bee & Maria Michela Dickson & Flavio Santi, 2018. "Likelihood-based risk estimation for variance-gamma models," Statistical Methods & Applications, Springer;Società Italiana di Statistica, vol. 27(1), pages 69-89, March.
    18. Mr. Il Houng Lee & Mr. Murtaza H Syed & Mr. Liu Xueyan, 2012. "Is China Over-Investing and Does it Matter?," IMF Working Papers 2012/277, International Monetary Fund.
    19. Bin, Peng & Chen, Xiaolan & Fracasso, Andrea & Tomasi, Chiara, 2018. "Resource allocation and productivity across provinces in China," International Review of Economics & Finance, Elsevier, vol. 57(C), pages 103-113.
    20. Chadwick Curtis, 2013. "Economic Reforms and the Evolution of China's TFP," 2013 Meeting Papers 1023, Society for Economic Dynamics.

    More about this item

    Keywords

    Overinvestment; Capital return; Total factor productivity; Real interest rate; Financial development;
    All these keywords.

    JEL classification:

    • E01 - Macroeconomics and Monetary Economics - - General - - - Measurement and Data on National Income and Product Accounts and Wealth; Environmental Accounts
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:asieco:v:49:y:2017:i:c:p:12-25. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/asieco .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.