is not easy to keep such a high rate of investment in the long run, and even in the presence of favorable policies, it is almost impossible to achieve it without economic fundamentals.
For this reason, it is necessary to deeply analyze the capital return in China. The study shows that such a high rate of investment in China has not led to a decline in the capital return; on the contrary, much empirical evidence provided by scholars in recent years shows that, since the middle and late 1990s, China’s return on capital has been on the rise for a long time, as reported earlier by the World Bank.4 The results of the estimation of China’s return on capital by Bai, Hsieh and Qian based on the national income data suggest that China’s return on capital has been maintained at a high level of more than 20% throughout the period of reform and opening-up, and also has been on the rise in recent years.5 In view of the results of the calculation of capital returns and of capital stock data in the financial accounts in industrial enterprises, the Research Group of the CCER China Economic Observer demonstrates that China’s return on capital presents a feature of first falling then rising, and the nine series of indicators show a sustained trend of growth after the end of the last century. By calculating the rate of return on industrial capital, Shu Yuan, Zhang Li and Xu Xianxiang also point out that the rate of capital return in China has increased significantly over the past decade.6 From the perspective of vintage capital theory, Fang Wenquan re-estimates the capital return in China, and adjusts the rate of capital return downward by 3%–5% by virtue of the revised depreciation rate, but the overall change remains upward.7 Based on the calibration of statistical caliber and the method of calculation, Zhang Xun and Xu Jianguo match the different measurement methods of capital return in China, and further conclude that the total return on capital has risen steadily from 1998, but dropped in 2009; however, the return on industrial capital still presents an upward trend, for instance, the return on industrial fixed assets was up to 27.8% in 2012.8 The upward trend of China’s return on capital is clearly shown in the report data in Figure 1.3.
Figure 1.2. Comparison of investment rates between China and the world’s major economies (1980–2014).
Note: Investment rate, known as capital formation rate, refers to the percentage of total capital formation in GDP.
Source: World Economic Outlook Database compiled by the International Monetary Fund.
Figure 1.3. Return on industrial capital in China (1993–2014).
Note: The two kinds of Chinese industrial capital returns from 1993 to 2012 are calculated according to the method of Lu et al. (2008). In this method, the total profit is the amount of profit without a deduction of enterprise income tax, which is a measurement index of capital return; asset and equity (net assets) are two measurement indexes of capital stock with different calibers.
Source: Compilation of the Statistical Data of China’s Industrial Transportation and Energy for 50 Years and The China Statistical Yearbook over the years.
So, how can we understand the phenomenon of the coexistence of a high rate of investment and a rising capital return in China? This phenomenon is not only inconsistent with the law of diminishing marginal capital returns but also significantly different from the international developmental experience. Solving this riddle is undoubtedly the key to understanding China’s model of economic development.
2. The riddle of China’s rising savings rate
China’s national savings rate has been rising steadily, and especially in the 21st century, it has risen faster from 37.6% in 2000 to 52.6% in 2010, and recently fallen to 49.5% in 2014 (see Figure 1.4). China’s high savings support not only its high investment from the capital supply side but also greatly contribute to the imbalance of the country’s economic structure. On the one hand, the imbalance of the low consumption–high savings structure starts to emerge; on the other hand, the storage–investment difference is expanding, resulting in an external imbalance.9 Greenspan even argues that a high savings rate in developing countries has led to the long-term low interest rate and been the fundamental cause of the housing bubble and the global financial crisis of the past two decades.10 Therefore, it is particularly important to explain the reasons for China’s high national savings rate and thus develop the idea of alleviating structural imbalances.
To understand the root cause of the rising rate of national savings, it is necessary to decompose the structure of national savings. According to departments, national savings can be divided into resident savings, enterprise savings and government savings. Figure 1.5 shows the proportion of those three types of savings in the national savings since 2000. In 2009, the three types of savings accounted for 48.3%, 41.9% and 9.8% of national savings, respectively, clearly showing the dominant position of residents and enterprises in the national savings. In recent years, the savings rate of residents (residents’ savings rate) and the savings rate of enterprises both have shown an upward trend to jointly raise the overall national savings rate. Therefore, the discussion of resident savings and enterprise savings is conducive to understanding the national savings rate. Fan Gang and Lu Yan explain why the enterprise savings rate has been rising in recent years.11 Through study, they believe that China is still in the dual economy state before the Lewis turning point, and the existence of a surplus labor force puts the labor force in a weak position in the game of labor and capital, further leading to a slow increase in wages; with the reform of the system and the opening-up of the market, the efficiency of the production of enterprises has greatly improved, but capital occupies more of this part of the value. With the expansion of the capital scale, profits will accumulate at a higher rate and eventually form large-scale enterprise savings.
Figure 1.4. China’s national consumption rate and savings rate (1980–2014).
Note: The consumption rate is the proportion of consumption expenditure in the GDP with an expenditure-based GDP accounting; savings rate = 1 − consumption rate.
Source: China Statistical Yearbook.
China’s resident savings rate also keeps rising from 31.1% in 2000 to 40.4% in 2009 (Figure 1.6). In spite of a slight decrease in recent years, the proportion of resident savings is still large and will further increase under the guidance of the policy of “increasing the disposable income of residents”, which will play a significant role in determining the trend of the national savings rate in the future. In addition, according to the international comparative study of Blanchard and Giavazzi, the savings rate of Chinese enterprises and of the Chinese government are not exceptional in transnational comparisons, and the high savings rate in China is still closely associated with a high resident savings rate.12 Thus, it is necessary to focus on the reasons for the rise of the resident savings rate in China in recent years, and further explore the trend of the national savings rate.
Figure 1.5. Proportion of three-sector savings in national savings (2000–2009).
Source: 2001–2010 Fund Flow Statement in The China Statistical
