Aggregate Investment in People’s Republic of China: Some Empirical Evidence

Abstract

Capital investment holds a key role in the economic growth and performance of the People’s Republic of China (PRC). During the last two decades, fixed capital formation has taken up roughly one third of gross domestic product (GDP) and kept a double digit growth on average, albeit with remarkably volatile dynamics (5.5 percent growth in 1981, nearly 40 percent in 1985, −7 percent in 1989, over 60 percent in 1993, down to 5 percent in 1999, and well above 20 percent in 2003). Fixed capital investment was dominantly driven by government plans under the old centrally planned economic regime. What drives the fast-growing and volatile aggregate investment now that the PRC economy has become increasingly market-driven after over two decades of reforms? How much, in particular, is aggregate investment driven by market forces and how much is still affected by policy-led factors?