Investment in China : reform and policy

Abstract

This thesis studies investment activity in China during the post-reform period. The focus is on the determination of investment with a view to identifying its specific financing sources, mechanism, and links with monetary and fiscal policies. The analysis is mainly based on a modified version of the flexible accelerator theory of investment. Although our study is exploratory, some clear conclusions have emerged. Econometric evidence indicates that investment in China is positively related to economic growth, the availability of credit, and negatively related to cyclical factors and real interest rates. Meanwhile, the thesis also explores the implications of excessive expansion of investment for macroeconomic stability. Overinvestment, defined as actual investment minus predicted investment, is found to be crucial in determining the short-run output.