The Evaluation of Over-Investing in China’s Economy

The Evaluation of Over-Investing in China’s Economy

In recent years, there has been a high ratio of investment to output in China, which has resulted in a high economic growth rate. The issue of investment is China is surrounded by various debates. One of them is on whether there is over-investment in China or not. Moreover, there is disagreement about the sustainability of China’s growth strategy of high saving and investment rates. Another controversy is about the cause of China’s high growth rate. The purpose of this report is to assess the investment rate in China and explore different views regarding the issue.

Over-Investment in China’s Economy

One of the debates regarding investment in China is about whether there is over investment. Some people argue that China has been over-investing as the share of capital income has been lower than the investment rate since the 1990s. However, others assert that China’s investment is not very high because after the drop in the return to capital in the 1990s, there has been a continuous rise in corporate profitability (Lee et al. 4).

According to Brandt and Zhu, there was a rise in the aggregate investment rate between 1978 and 2007 (4). While many argue that China’s balance between investment and consumption can be restored by shifting from investment to consumption, Brandt and Zhu argue that the solution is to continue redirecting investment to the non-state sector from the state sector (3). Adopting this solution can also enable China to maintain the growth performance that occurred in the last three decades.

According to Lee et al. China has been over-investing based on the Golden Rule (5). The level of investment is determined as follows:

Steady investment level = capital to output ratio (potential output growth rate + depreciation rate) / (1+ potential output growth rate).

Based on this rule, there was under-investment in China in the 1970s and 1980s. However, the investment levels increased, particularly after 2000. China increased its investments even further between 2007 and 2011 to offset the negative effects of the global crisis. During this period, China is estimated to have over-invested by approximately 12 to 20 % of GDP compared with its steady-state desirable level (Lee et al. 5). Lee et al. argue that the solution is for China to reduce its investment by 10 % (17).


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