## What’s Driving Investment in China?

_IMF Working Papers, November 1, 2006_

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- [Markdown version](/en/publications/wp/issues/2016/12/31/whats-driving-investment-in-china-20067/index.md)
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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

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### 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.

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## Content in this bundle

- **Annex I. Investment and Saving Data by Sector**
  - [Annex I. Investment and Saving Data by Sector (Markdown version)](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2006/_wp06265.pdf.md){rel="alternate" type="text/markdown"}
  - [Annex I. Investment and Saving Data by Sector (PDF)](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2006/_wp06265.pdf){rel="external" type="application/pdf"}

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_Source: https://www.imf.org/en/publications/wp/issues/2016/12/31/whats-driving-investment-in-china-20067_