China's Capital Returns and Investment Revisited

We revisit China's overinvestment problem by examining capital return from two perspectives. First, we re-estimate capital returns. The two existing estimation methods generate different results. After adjusting for statistical coverage and assumptions, the two methods achieve largely consistent results. The reconciled estimation shows China's capital returns increase quickly from 1998 to 2010, which helps explain the investment mania. Second, we explore what causes the capital return increases. We find both long-term growth (TFP increases) and short-term cycles (real interest rate and deviations from growth trend) help explain variations in capital returns