The Return on Capital in China and Its Determinants

Bai Chong-En 1 and Zhang Qiong 2

1 School of Economics and Management, Tsinghua University, Beijing, China
2 School of Economics, Central University of Finance and Economics, Beijing, China

Abstract:  This paper first estimates the overall return on capital in China between 1978 and 2013. It then identifies the determinants of return on capital by analyzing provincial panel data and breaks down the causes of swerves in capital return after the eruption of the global financial crisis in 2008. It finds that: (1) there is significant inertia in the return on capital; (2) government intervention has significantly negative impact on capital return; (3) a significantly negative correlation is observed between investment rate and return on capital; and (4) the increases in the shares of secondary and tertiary industries in the economy have significantly positive impact on return on capital. This paper concludes that the growth in investment rate and the expansion of government size are both important contributors to the recent decline in China’s return on capital since the financial crisis.

Keywords: return on capital, X-efficiency, effective factor utilization, allocation efficiency

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