What's Driving Investment in China?, Issues 2006-2265
International Monetary Fund, Nov 1, 2006 - Business & Economics - 39 pages
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.
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adjusted allocated efficiently authors budget balance Bureau of Statistics Cash from operations CEIC China correlation deflator Depreciation Disposable income dividends domestic loans eastern provinces enterprise saving Equation estimates expenditure-side GDP FAI data financial investment financing Fixed Asset Investment fixed capital formation Flow of Funds GDP revision GFCF-to-GDP ratio government saving gross capital formation Gross fixed capital Heilongjiang increase infrastructure Inner Mongolia investment in residential land sales Macao SAR manufacturing investment Memo items mortgage interest rates mortgage lending National Bureau Ningxia panel regression percent in 2005 percent of expenditure-side percent of GDP property Current transfers Province of China R-squared real estate development real estate investment real interest rates recent residential real estate retained earnings Return on capital saving and investment self-raised funds Shanghai share of investment Social Security Fund SOEs Sources state-controlled firms statistically significant Table Taiwan Province urban FAI VAT rebate western provinces