Return to Capital is not low in China

From Development Bank Research Bulletin (DBRB) blog:

There are two famous myths about China.

The first one is that the savings rate is high because ordinary Chinese worry about the lack of safety net. This myth has been busted because evidence has shown that Chinese household savings rate is actually lower than the Indian one. The overall saving rate is high because businesses heavily save their self-generated profit for re-investment. For private business, the reason is the lack of access to other forms of external finance. For state-owned enterprises, managers always prefer re-investing the profits to paying dividends to the government. Therefore, the right solution is: (a) to reform the financial sector and improve the access to finance for private sector businesses; (b) force state-owned enterprises to pay dividends! Building a safety certainly will help, but only at the margin.

The second famous myth is that return to capital is very low in China, and that the current high investment rate is a sign of money being wasted. A NBER working paper “The return to capital in China“, written by three prominent Chinese economists, however shows that the return to capital in China has been remained flat at roughly 20% since 1998, which is not low compared to the rest of the world. Olivier Blanchard also provides a nice discussion (PDF file) of of the results. [Full Text]

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