The Return on Capital in China and Its Determinants

Bai Chong-En  and Zhang Qiong
School of Economics and Management, Tsinghua University, Beijing, China
School of Economics, Central University of Finance and Economics, Beijing, China

Abstract: This paper frst estimates the overall return on capital in China between 1978 and 2013. It then identifes 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 fnancial crisis in 2008. It fnds that: (1) there is signifcant inertia in the return on capital; (2) government intervention has signifcantly 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 signifcantly positive impact on return on capital. This paper concludes that the growth in investment rate and the expansion of overnment size are both important contributors to the recent decline in China’s return on capital since the fnancial crisis.

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

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