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What’s Driving Investment in China?

Author

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  • Steven A Barnett
  • Ray Brooks

Abstract

Investment has grown rapidly in China in recent years, reaching more than 40 percent of GDP. Despite good progress on bank and enterprise reforms, weaknesses remain that could contribute to inefficient investment decisions. Manufacturing, infrastructure, and real estate have been the drivers of fixed asset investment. Econometric analysis presented in the paper suggests that manufacturing investment is strongly correlated with firms' liquidity, largely retained earnings. Analysis of residential real estate investment shows that it is weakly correlated with real household income growth and real mortgage interest rates. A policy implication of these findings is that reducing liquidity in firms, for example by requiring state-owned enterprises to pay dividends to the government, and using monetary policy to reduce liquidity increase real interest rates, would slow investment in manufacturing and real estate.

Suggested Citation

  • Steven A Barnett & Ray Brooks, 2006. "What’s Driving Investment in China?," IMF Working Papers 06/265, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:06/265
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    References listed on IDEAS

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    1. Eswar Prasad & Shang-Jin Wei, 2007. "The Chinese Approach to Capital Inflows: Patterns and Possible Explanations," NBER Chapters,in: Capital Controls and Capital Flows in Emerging Economies: Policies, Practices and Consequences, pages 421-480 National Bureau of Economic Research, Inc.
    2. Liu Hongyu & Yun W. Park & Zheng Siqi, 2002. "The Interaction between Housing Investment and Economic Growth in China," International Real Estate Review, Asian Real Estate Society, vol. 5(1), pages 40-60.
    3. Wensheng Peng & Matthew Yiu & Dickson Tam, 2005. "The Property Market and the Macroeconomy of the Mainland: A Cross Region Study," Working Papers 0512, Hong Kong Monetary Authority.
    4. 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.
    5. Kuijs, Louis, 2005. "Investment and saving in China," Policy Research Working Paper Series 3633, The World Bank.
    6. Shang-Jin Wei & Genevieve Boyreau-Debray, 2004. "Can China Grow Faster? A Diagnosis of the Fragmentation of Its Domestic Capital Market," IMF Working Papers 04/76, International Monetary Fund.
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    Citations

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    Cited by:

    1. Jahangir Aziz, 2006. "Rebalancing China’s Economy; What Does Growth Theory Tell Us?," IMF Working Papers 06/291, International Monetary Fund.
    2. Kahrl, Fredrich & Roland-Holst, David & Zilberman, David, 2013. "Past as Prologue? Understanding energy use in post-2002 China," Energy Economics, Elsevier, vol. 36(C), pages 759-771.
    3. 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.
    4. C Niranjan Rao, 2008. "The Role of Intellectual Property Rights in Information and Communication Technologies," Working Papers id:1742, eSocialSciences.
    5. He, Dong & Zhang, Wenlang, 2010. "How dependent is the Chinese economy on exports and in what sense has its growth been export-led?," Journal of Asian Economics, Elsevier, vol. 21(1), pages 87-104, February.
    6. Roberts, Ivan & Rush, Anthony, 2012. "Understanding China's demand for resource imports," China Economic Review, Elsevier, vol. 23(3), pages 566-579.
    7. Lipschitz, Leslie & Rochon, Céline & Verdier, Geneviève, 2011. "A real model of transitional growth and competitiveness in China," Journal of Asian Economics, Elsevier, vol. 22(4), pages 267-283, August.
    8. Leslie Lipschitz & Genevieve Verdier & Celine Rochon, 2008. "A Real Model of Transitional Growth and Competitiveness in China," IMF Working Papers 08/99, International Monetary Fund.
    9. Jahangir Aziz, 2008. "Deconstructing China’s and India’s Growth: The Role of Financial Policies," Working Papers id:1714, eSocialSciences.
    10. Arslan Razmi, 2008. "Is the Chinese Investment- and Export-Led Growth Model Sustainable? Some Rising Concerns," UMASS Amherst Economics Working Papers 2008-09, University of Massachusetts Amherst, Department of Economics.
    11. Jahangir Aziz, 2008. "Real and Financial Sector Linkages in China and India," IMF Working Papers 08/95, International Monetary Fund.
    12. Ohno, Sanae & Shimizu, Junko, 2015. "Do exchange rate arrangements and capital controls influence international capital flows and housing prices in Asia?," Journal of Asian Economics, Elsevier, vol. 39(C), pages 1-18.

    More about this item

    Keywords

    China; Absorptive capacity; Investment; Resource allocation; Capacity; real estate; real estate investment; residential real estate; land sales; house prices;

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