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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.

Suggested Citation

  • John Knight & Sai Ding, 2009. "Why does China invest so much?," Economics Series Working Papers 441, University of Oxford, Department of Economics.
    • Handle: RePEc:oxf:wpaper:441
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    Cited by:

    1. Alessandro Borin & Enrica Di Stefano, 2016. "Economic reforms in China and India: past and future challenges," Questioni di Economia e Finanza (Occasional Papers) 337, Bank of Italy, Economic Research and International Relations Area.
    2. Gunther Schnabl, 2019. "China's Overinvestment and International Trade Conflicts," China & World Economy, Institute of World Economics and Politics, Chinese Academy of Social Sciences, vol. 27(5), pages 37-62, September.
    3. John Knight & Wei Wang, 2011. "China’s Macroeconomic Imbalances: Causes and Consequences," The World Economy, Wiley Blackwell, vol. 34(9), pages 1476-1506, September.
    4. Lv, Bingyang & Liu, Yongzheng & Li, Yan, 2020. "Fiscal incentives, competition, and investment in China," China Economic Review, Elsevier, vol. 59(C).
    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, February.
    6. Sai Ding & Alessandra Guariglia & John Knight & Junhong Yang, 2021. "Negative Investment in China: Financing Constraints and Restructuring versus Growth," Economic Development and Cultural Change, University of Chicago Press, vol. 69(4), pages 1411-1449.
    7. 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.
    8. Harashima, Taiji, 2016. "The Impending Long March of the Chinese Economy," MPRA Paper 73275, University Library of Munich, Germany.
    9. Waseem Khan & Sana Fatima, 2016. "An Assessment of Sectoral Dynamics and Employment Shift in Indian and Chinese Economy," South Asian Survey, , vol. 23(2), pages 119-134, September.
    10. Bednarczyk Jan L. & Brzozowska-Rup Katarzyna, 2019. "Non-Decreasing Economic Growth Rate Of Inflation (Ndegri) In Light Of Empirical Studies," Econometrics. Advances in Applied Data Analysis, Sciendo, vol. 23(1), pages 9-18, March.
    11. Sarmiza Pencea & Iulia Monica Oehler-Sincai, 2015. "Investment-Led Development In China – From Past Accomplishments, To Future Challenges," Romanian Economic Business Review, Romanian-American University, vol. 10(2), pages 87-102, June.
    12. repec:zbw:bofitp:2011_015 is not listed on IDEAS
    13. M. Albert & C. Jude & C. Rebillard, 2015. "The Long Landing Scenario: Rebalancing from Overinvestment and Excessive Credit Growth. Implications for Potential Growth in China," Working papers 572, Banque de France.
    14. Dieppe, Alistair & Gilhooly, Robert & Han, Jenny & Korhonen, Iikka & Lodge, David, 2018. "The transition of China to sustainable growth – implications for the global economy and the euro area," Occasional Paper Series 206, European Central Bank.
    15. John Knight & Wei Wang, 2011. "China’s Macroeconomic Imbalances: Causes and Consequences," The World Economy, Wiley Blackwell, vol. 34(9), pages 1476-1506, September.
    16. Ding Lu, 2011. "Transition of China’s growth pattern," Frontiers of Economics in China, Springer;Higher Education Press, vol. 6(4), pages 535-555, December.
    17. Yao Yao & Ruhul Salim, 2020. "Crowds in or crowds out? The effect of foreign direct investment on domestic investment in Chinese cities," Empirical Economics, Springer, vol. 58(5), pages 2129-2154, May.
    18. Tao Gu, 2020. "The behavior of private entrepreneurs in an imperfect financial market," Economics Bulletin, AccessEcon, vol. 40(1), pages 349-358.
    19. Karel Brůna & Jiří Pour, 2023. "Population aging and structural over/underinvestment," Economic Change and Restructuring, Springer, vol. 56(4), pages 2339-2383, August.
    20. van Treeck, Till. & Sturn, Simon., 2012. "Income inequality as a cause of the Great Recession? : A survey of current debates," ILO Working Papers 994709343402676, International Labour Organization.
    21. Gu, Tao, 2019. "Wage determination and fixed capital investment in an imperfect financial market: the case of China," MPRA Paper 95986, University Library of Munich, Germany.
    22. Satriya Sulistiyo Aji & Young Sang Kim & Kook Young Ahn & Young Duk Lee, 2018. "Life-Cycle Cost Minimization of Gas Turbine Power Cycles for Distributed Power Generation Using Sequential Quadratic Programming Method," Energies, MDPI, vol. 11(12), pages 1-21, December.

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    More about this item

    Keywords

    China; Financial market; Credit constraint; Investment; Rate of profit; Saving;
    All these keywords.

    JEL classification:

    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • G1 - Financial Economics - - General Financial Markets
    • O5 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies

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