NCPA - National Center for Policy Analysis


July 16, 2007

China has one of the highest investment rates in the world -- over 40 percent of its gross domestic product (GDP) in recent years - which could be helping to keep the country's return to capital low, according to researchers with the National Bureau of Economic Research.


  • The real rate of return to capital in China was around 25 percent during 1978-93, fell during 1993-98 and fluctuated around 20 percent since 1998.
  • When adjusted to include inventory, exclude all taxes on businesses and exclude the residential housing sector, the estimated real return to capital in China since 1978 fluctuated between 8 percent and 12 percent and rose to new highs in recent years.
  • In both estimates, the aggregate real return to capital in China does not appear to be low by comparison with other economies.

Why have China's high investment rates not reduced returns to capital?  The researchers propose a few possible explanations:

  • First, output growth driven by growth in total factor productivity appears to have been quite rapid.
  • Therefore, the capital-output ratio does not appear to have risen by much, despite the high investment rate.


  • The capital share of aggregate income has increased steadily in China since 1998, precisely the period that witnessed a significant increase in the investment rate.
  • One explanation might be that a gradual restructuring of China's industrial sector has moved it toward more capital-intensive industries, requiring higher aggregate investment rates in the steady state.

Source: Les Picker, "The Return to Capital in China," National Bureau of Economic Research, July 2007; based upon: Chong-En Bai, Chang-Tai Hsieh and Yingyi Qian, " The Return to Capital in China," National Bureau of Economic Research, Working Paper #12755, December 2006.


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