What’s Driving Investment in China?
IMF Working Papers, November 1, 2006
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Bibliographic details
- Authors: Steven A Barnett, R. Brooks
- Published: November 1, 2006
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451865257.001
Summary
- 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.
Key Findings and Evidence
- Manufacturing investment is strongly correlated with firms' liquidity (largely retained earnings).
- Residential real estate investment is weakly correlated with:
- real household income growth
- real mortgage interest rates
- Fixed asset investment in China has been driven by:
- manufacturing
- infrastructure
- real estate
Policy Implications and Recommendations
- Reducing liquidity in firms could slow investment in manufacturing and real estate. One example policy measure:
- requiring state-owned enterprises to pay dividends to the government
- Using monetary policy to reduce liquidity (increase real interest rates) would slow investment in manufacturing and real estate.
Content in this bundle
- Annex I. Investment and Saving Data by Sector