What's Driving Investment in China?

41 Pages Posted: 12 Jan 2007

See all articles by Ray Brooks

Ray Brooks

International Monetary Fund (IMF) - Asia and Pacific Department

Steven A. Barnett

International Monetary Fund (IMF) - Fiscal Affairs Department

Date Written: November 2006

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.

Keywords: Investment, China, Absorptive capacity, Resource allocation

JEL Classification: E22

Suggested Citation

Brooks, Ray and Barnett, Steven Alan, What's Driving Investment in China? (November 2006). IMF Working Paper No. 06/265, Available at SSRN: https://ssrn.com/abstract=956728

Ray Brooks (Contact Author)

International Monetary Fund (IMF) - Asia and Pacific Department ( email )

700 19th Street NW
Washington, DC 20431
United States

Steven Alan Barnett

International Monetary Fund (IMF) - Fiscal Affairs Department ( email )

700 19th Street, NW
Washington, DC 20431
United States

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