Large Domestic Non-Intermediated Investments and Government Liabilities Challenges Facing China’s Financial Sector Reform

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Large Domestic Non-Intermediated Investments and Government Liabilities –

Challenges Facing China’s Financial Sector Reform

David D. Li1

Center for China in the World Economy

Tsinghua Univesity


Hong Kong University of Science and Technology
First Draft:

April 4, 2006

Executive Summary

In order to understand the challenges to China’s financial sector reform and the implications for the world financial system, this paper identifies two important features of China’s financial system. The first is that the amazingly high growth rate of fixed asset investment, which has been fueling China’s rapid economic growth, has been mostly financed by domestic enterprises’ retained profits together with informal lending from the households. We refer to the sum of these two sources of investments as Domestic Non-Intermediated Investments (DNI). We find that China’s DNI to GDP ratio has been increasing and has reached a level higher than many industrial countries. We also find that a major driver of the high ratio of DNI to GDP is the rapid growth of non-state enterprises in China, which have been mostly excluded from the formal financial sector. We argue that the increasing DNI is a potential threat to China’s macroeconomic stability if China chooses to lift control on capital flow, since the DNI may go abroad instead of remaining in China. The second feature of China’s financial sector is the mounting liabilities of Chinese governments accumulated as a result of China’s unique approach to economic reform. The mounting liabilities will reach a level of 120% of GDP in 2018 matched by equally high but perhaps illiquid government assets mostly in the form of state owned enterprise shares. This implies that the Chinese government will continue relying on borrowing from Chinese households in various forms, preventing liberalization of capital control in the near future. Meanwhile, in the near future, continued capital control will imply excessive foreign currency reserves. How to manage the reserve posts is another challenge to the Chinese government.


The weakest part of China’s economic emergence is the financial sector. This is a conclusion that observers of the Chinese economy would all agree upon. Especially if one compares China’s financial sector to that of India and most other transition economies, the weakness of the Chinese financial sector is even more obvious. Therefore, a natural question is in what ways will China’s weak financial sector impede China’s continued economic emergence or economic growth? What are the potential problems implied by the weakness of the financial sector. What are the challenges that China’s economic and political leadership will have to resolve in order for China to continue sustaining its current trend of economic development? The purpose of this paper is to understand the challenges facing China’s economic and political leadership posed by the financial sector. Specifically, we will first try to understand how China has been able to finance its rapid economic growth via rapid growth in fixed asset investment. What are the potential problems in the current pattern of China’s financing of the rapid growth of fixed asset investment? How has China managed to finance the investment despite the inefficient financial sector? Second, we will try to understand another problem for China’s financial sector: how can it deal with a potentially high level of government liability? How will the government finance their future liability? Government liabilities are potentially a source of destabilization for any financial sector. The third purpose of the paper is to try to form some certain understanding of potential reforms of China’s financial sector keeping in mind the above arguments. What are the constraints the Chinese leadership will have to face when reforming the financial sector and what are the implications of dealing with these constraints?

Following the introduction, part one of this paper will provide some understanding of how China has managed to finance its rapid fixed asset investment, despite a very inefficient financial sector. Part two will assess the level of future government liability and compare that with government assets. Part three provides analysis based on the assessments in parts one and two on the future direction China’s financial sector reform, and explores implications for China’s own economic development and for the international community.

  1. Domestic Non-Intermediated Investments: The Key to China’s Financing of High Physical Investment

The obvious but important fact about China’s economic growth is that the single most important driver is the rapid growth of fixed asset investment in China. In this regard, China is no exception among newly industrialized East Asian economies. Fixed asset investment, which is an economic term used by government officials and the economic community, refers to investment resulting in physical assets. This kind of investment includes infrastructure investment, investment in industrial production facilities, and investment in social institutions, such as primary schools and universities. Fixed asset investment also includes investments in the real asset sector, including both commercial real assets and residential assets. The concept of the fixed asset investment does not include investment for the purpose of transferring the ownership or control rights of assets. For example, investment by households of private entrepreneurs to buy efficient equity shares of a listed company in a stock market is not considered a fixed asset investment. Therefore, roughly speaking the concept of fixed asset investment refers to the total amount of investment in the Chinese economy excluding investment in intangible forms, such as brand names and knowledge in the economy.

Chart 1 provides a description of the evolution of China’s fixed asset investment (FAI) as a share of GDP. It is clear from Chart 1 that there was a general upward trend of the share of FAI in GDP. The ratio of FAI to GDP was at a level below 30% before 1993, and after 1993, the ratio steadily picked up, reaching a level of over 40%. The level of China’s FAI to GDP in recent years is alarmingly high, not only from China’s own historical perspective but also from an international perspective. In the era of central planning and also in the 1980s, the Chinese economy faced a problem of overrunning investment demand, as characterized by the phrase of “investment hunger”, as phrased by Janos Kornai (Kornai 1980). China’s economic leaders in the 1980s, including senior officials such as Chen Yun, repeatedly emphasized that the government should spare no effort in controlling the FAI to GDP ratio. In that era, the target level of FAI to GDP ratio was 25%, and definitely below 30%. These leaders would have been extremely alarmed by today’s high level of FAI to GDP. From an international perspective, China’s FAI to GDP ratio is also very high. Japan and the Republic of Korea, in their fastest growing years, provide good references. The Japanese investment ratio, in the rapid growth era after World War II up to the late 1980s was rarely above 35%, typically in the range of 30 to 35%. Only in very few years has the ratio exceeded 35%. The same is true with the Korean economy. In any case, the high level of China’s fixed asset investment to GDP is a unique feature, but is not a permanent feature of the Chinese economy.

How has China managed to finance such a high level of fixed asset investment? In other words, what are the sources of savings that are financing this level of fixed asset investment in China and how are the savings channeled into such investment? In the Chinese economy, there are six sources of finance for fixed asset investment. The first source is called government budgetary and extra-budgetary funds. These are funds from government budgets, broadly defined. Chinese governments, especially sub-provincial governments, collect tax revenue and fees. In addition, they have access to various sources of funds. At the local government level, the major source of funds is the conversion fee of agricultural lands. Similar to Hong Kong policy, Chinese county and provincial governments can appropriate agricultural land from farmers’ collectives at a nominal fee, which is typically very low (for example, five to six times the annual net income of farmers). After appropriating the land from farmers’ collectives at a nominal fee, the local government auctions the land to various investors, including real estate developers or industrial investors. These create large one-time revenue for local governments. Alternatively, a local government can appropriate agricultural land and make some initial investments and convert the land into an industrial park with basic infrastructure provisions, such as water, power, paved roads and natural gas. Then the government will either rent out or sell portions of the industrial park to industrial investors and obtain the fee. Through various means, the Chinese government has become a major investor, especially at the provincial and sub-provincial level. It should be noted that until the very early stage of reform in the early 1980s, the Chinese central and provincial governments were the only shareholders of state-owned enterprises, and these state-owned enterprises relied exclusively on government budgets for their investment. In turn, the state-owned enterprises had their taxes remitted and delivered their gross profits to their respective government agencies. Since the early 1980s, the practice of budgetary appropriation of investment for these enterprises was reformed into a system where state-owned enterprises go to banks for loans for their investment and they must pay the principal and interest of their accounts with their earnings. This explains the dramatic drop in the ratio of government budgetary and extra-budgetary investment. Chart 2 shows that the ratio of budgetary and extra-budgetary appropriation as a share of China’s total investment. Indeed, in the early 1980s and in the early 1990s, there was a decided drop of the share of that type of investment for the reasons mentioned. Since the early 1990s, the ratio of budgetary investment has been lower than 10% and in recent years has been lower than 5%. Therefore, it is safe to conclude that in today’s Chinese economy and in the near future, the budgetary and extra-budgetary appropriations is not and will not become a major source of fixed asset investment. In fact, many of China’s sub-provincial governments have faced major budgetary problems in balancing their revenue with their expenses, and there are repeated calls from the central government to reduce local government involvement in fixed asset investment. Both trends have contributed to the continued decline in the share of government budgetary and extra-budgetary appropriation in total fixed asset investment.

The second source of investment is, of course, bank loans. As discussed above, bank loans gradually took over government budget appropriation as the main source of investment. China’s banking sector, as surveyed by Chongen Bai, is owned by four large state-owned commercial banks which are currently under reform. Additionally, in recent years, there are many new commercial banks entering. Chart 3 shows that the ratio of bank loans in total fixed asset investment. The figure conforms to the discussion above, that is, the ratio of bank loans in total fixed asset investment steadily increased from a level below 15% in the early 1980s to a peak level in 1993, up to around 28%. Since the early 1990s, however, this ratio is declining. Why the steady declining of the ratio of bank loans to fixed asset investment? There are at least two very likely explanations. The first explanation is that since the early 1990s, the structure of the Chinese economy has gradually shifted from state-owned production to non-state-owned enterprise, whereas the banking sector is still governed by the “Big Four” state-owned commercial banks, and they are configured to manage transactions with state-owned agencies and are not effective in making loans to non-state-owned enterprises. For example, state-owned enterprise accounting practices are agreeable to the lending criteria of state-owned commercial banks, whereas the non-state-owned enterprises typically do not have such accounting practices. Another explanation is state-owned commercial banks are under great pressure to improve their lending quality in the form of reducing non-performing loans. Therefore, state-owned commercial banks are increasingly cautious in distributing loans, and causing a decrease of their lending in the share in total fixed asset investment. The ratio of bank loans in total fixed asset investment is under 20% in recent years.

The third source of total fixed asset investment is the issuing of new securities, including Initial Public Offerings (IPO) of enterprise equity shares and corporate bonds, although corporate bonds are only a small proportion of total securities issuance. China’s two stock markets in Shanghai and Shenzhen were established in the early 1990s. Initially, the Chinese government and people showed a high level of enthusiasm for the role of the securities market. But by the late 1990s, due to the poor performance of the securities market in China, due to poor regulation and the Chinese legal infrastructure, the enthusiasm for the security market quickly turned into disappointment and criticism. As a result, the role of the amount of IPO and Secondary Public Offerings (SPO) gradually diminished. Chart 4 shows that the share of new stock of corporate bond issuance in total fixed asset investment. The chart shows that in 1993, the peak of the share of security issuance, the ratio was 10%. Since then, the ratio has been gradually falling with a few minor peaks, which reflected the fact that in this period, the government tried various ways to prop up the stock market indices, therefore encouraging new issuance of security. In recent years, since the beginning of this century, the ratio came down to less than 4%. One can conclude that the role of the securities market in China has been very limited in financing total fixed asset investment.

The fourth source of total fixed asset investment is foreign investment, including Foreign Direct Investment (FDI) and foreign lending to Chinese agencies, mostly to government agencies, since in China, in principle, individual corporations cannot borrow from overseas foreign agencies. There were a few rare exceptions when provincial governments established investment trust companies, attracting foreign equity investment, and the regime of this international investment trust caused major problems because of poor investment decisions by the investment companies matched by forced expectations of foreign investors that the Chinese provincial government will bail out the investment trusts. Foreign direct investment in China was not a major phenomenon until the early 1990s, after Deng Xiaoping called for accelerated reform. In recent years, China has been the best among developing countries at attracting FDI, and the level of inflow of FDI has been quite stable, in the neighborhood of USD 60 billion a year. The Chinese central government has been very cautious in borrowing from foreign investment agencies in the form of bonds. There is an aggregated level of foreign funds borrowed by the Chinese government and agencies, explaining the relatively low level of bonds. Chart 5 shows the share of foreign direct investment. As shown in the figure, the ratio was high in the early 1980s, when the government tried to import high-technology equipment to modernize the economy. Then, the ratio began to pick up in the early 1990s, and then has decreased in recent years. The reason it has come down is due to the rapid growth of China’s economy and the growth of total fixed asset investment, whereas the absolute level has remained constant (and high) at around USD 60 billion. Overall, looking at the future, China’s economic community and the Chinese government are debating whether China has attracted so much foreign investment with its high savings rate, meaning perhaps that there are too few detracting points from favorable policies to foreign investors. Therefore it is reasonable to forecast the ration of FDI in total fixed asset investment will continue to decline and remain at a relatively low level, in the neighborhood of 5%.

The fifth part of fixed asset investment is informal investment from households. Informal investment from households is widely believed to be a major source of financing for China’s non-state-owned enterprises. But this proposition tends to be unsupported by empirical evidence. Lacking direct data, we adopted a strategy of calculating the upper bound of the level of informal investment from households by the following approach: each year, we calculate the total increase of Chinese household disposable income, as reported by the national statistical bureau. Also, in each year, we calculate the increase in household deposits in China’s banking sector. The difference between the increase in household disposable income and that of the household deposits forms an upper bound of household informal investment. This is the source of informal investment of households. It is an upper bound rather than an accurate number because households may put aside part of their income as cash at home, or they may make investments in the equity market.2 It turns out that the upper bound is a very small share of fixed asset investment. In fact, in many years, this upper bound is negative, showing that households are actually taking money away from their invested projects. This ratio is typically less than 1% of total fixed asset investment.

The last source of investment is enterprise retained profits or funds. Examples include undistributed profits, depreciated funds of enterprise, and special development funds such as welfare funds, which are allowed to exist by Chinese accounting practices. These funds are accumulated contributions from the enterprise earnings each year. Chart 6 puts together the total amount of enterprise retained funds and informal sector lending as a share of fixed asset total investment. As shown here, the ratio since the 1990s has been at a very high level, and shows the tendency of rapid increase. In recent years, it has reached 70%. This is by far the biggest source of China’s total asset fixed investment. How much is the enterprise retained fund and informal lending as a share of GDP? Chart 7 shows the ratio. As can be seen, the ratio is very high and is quickly increasing, from a level of 10% to a level of over 35%. To help illustrate this trend further, we define a new concept called domestic non-intermediate investment (DNI). As the sum of enterprise retained funds and informal lending, these two sources of investment are direct investment from China’s economic agents, without the help of China’s formal financial sector, such as banks and securities markets. These funds are not intermediated. They find for themselves ways to invest. In order to understand DNI better, we divide it by China’s non-agricultural GDP, since it is in the non-agricultural sector that DNI is mostly active. This ratio is shown in Chart 8, and this ratio is also very high, higher than 40% in recent years. Among DNI, the enterprise retained funds as a share of total fixed asset investment, is also very high, as shown in Chart 9. In recent years, it reached a level of 50-60%, with the amount of retained profit as a share of GDP (Chart 10), also reach a level of over 35%, and this ratio tends to be rather volatile.

How high is China’s ratio of 60%? It is useful to do some international comparisons. A recent study (Corbett and Jenkinson 1997) shows that for almost all developed countries, the ratio of internal source of funding to total investment is very high. Table 1 shows that for Germany, from 1970 to 1994, as high as 78.9% of total investment was covered by internal funds. For Japan, the ratio was 69.9%., for the U.K. it was 93.3 and for the United States, it was as high as 96.1%. Therefore, in terms of the share of retained funds in total investment, China’s ratio is not high. In fact, China is below the average of developed market economies. However, if we calculate the total amount of retained profits for the purpose of fixed asset investment, China ranks very high. Table 2 calculates the ratio of total retained funds as a share of GDP across countries. This shows that China currently has a significantly higher ratio of returned profits in financing total fixed assets.

Next we try to explain the variation in China’s total fixed asset investment that is explained by China’s share of DNI in total fixed asset investment. Two sets of preliminary regressions are run. Table 3 shows the national level, and Table 4 contains a regression of panel data consisting of a few provinces in China. Both tables indicate that the share of non-state-owned enterprises (in total value added) is significant, as both an economic and statistical explanation for the share of DNI to FAI. Next is business cycle nature. In the regression, we put in dummy variables for the years 1985, 1988, 1993, and 2003. These are dummy variables for high-growth years. The year dummy for 1993 is the most significant, indicating that in the economic cycle starting in the early 1990s, the ratio of DNI to FDI was very high. Also in the regression, the structure of the economy as measured by the share of heavy industry in GDP is also very important. In years or provinces with a high proportion of total industry in GDP, the share of DNI to FAI is very important. Surprisingly, the growth rate of household savings is not a major explanatory variable. Overall, the regressions indicate that perhaps the most significant sector affecting the increase of the DNI-FAI ratio is the increase of non-state enterprises in the economy. This is not surprising to most observers of the Chinese economy, because non-state enterprises have difficulty obtaining funds. Meanwhile, they are the most dynamic and efficient engine of rapid economic growth in China.

II. Liabilities of Chinese governments

A very important factor concerning China’s financial sector which has not received adequate attention is the size of government liabilities, specifically, how much will government liabilities amount to in the coming decade? To what extent will the evolution of government liabilities affect China’s financial sector. In this section, we argue that it is very likely that the Chinese government will accumulate a high amount of liability in their reforms, therefore yielding significant implications for the reform of China’s financial sector.

There are at least three important institutional factors affecting the level of future government liability in China. The first institutional factor is the principle of “reform by borrowing”. This is the implicit principle of Chinese economic reform, since the reforms in China have not been preceded by fundamental political change, shaking up the various interest groups in the economy. Therefore, the process of reform in China inevitably is one that compensates losers of reform. That is, various stakeholders of the pre-reform economic system can potentially block the process of reform. The stakeholders have to be bought out. Meanwhile, Ronald McKinnon (McKinnon 1994) argues in the reform era, the government’s fiscal capacity is diminishing. Therefore, the government has to rely on borrowing from households and enterprises in order to finance the above normal financial burden of compensating losers of reform. In sum, the principle of ”reform by borrowing” implies that the Chinese government will still face the need to finance the reform by borrowing. The second institutional factor to consider is that after two and a half decades of reform, China’s government is becoming attentive to demands of various vocal groups of society, and to the demands of the so-called “weak groups” of society, including the unemployed and farmers. The economic consequence of this political change is that the government has promised or will promise more and more economic progress to compensate various segments of population. For example, recently, the government promised it would resolve the problem of high prices for medical care. The government also promised to promote and invest in rural areas to “Construct the New Socialist Countryside”. Some scholars recently made the accusation that the program of “Constructing the New Socialist Countryside” requires physical or financial capacity of the government amounting to about 25% of Chinese GDP in the coming five to ten years. Thus, the populist tendency of the government is leading to more liabilities of the Chinese government. The third institutional factor concerning Chinese government liabilities is the nature of China’s banking sector, which has been mostly dominated by state-owned commercial banks. These banks historically have invested in government projects, including state-owned enterprises. Many of these investments end up losing money, even if these banks are state-owned and a large proportion of the assets of these banks are household or enterprise deposits. The financial loss accumulated over the years of the state-owned commercial banks eventually will become explicit debt of the central government. Therefore, this is another unique source of government liabilities in the years to come in China.

In addition to the three unique institutional factors affecting Chinese government liabilities, there is another institutional setup which has to be considered when discussing Chinese government liabilities. That is, since the early 1990s, the Chinese central government has had increasingly improved fiscal stature, as evidenced by the rapid increase in fiscal revenue, higher than the growth rate of GDP. Meanwhile, China’s sub-provincial governments are facing dire fiscal difficulties. Since reform in the early 1990s shifted the rights of collecting taxes and fees from local governments to the central government, many local governments have accumulated a large amount of fiscal deficits. Although by China’s fiscal budget law, local governments cannot issue debt and should not run into fiscal deficits, in reality, many governments accumulated fiscal debts by delaying payment to their employees, including schoolteachers and local government officials and staff. Eventually the fiscal difficulties of local governments will make themselves felt at the central government level. The central government has to pay at least those local governments in economically backward regions. How high will Chinese government liabilities be in coming years? Li and Li, in the Cato Journal of 2003, made a simple calculation. According to their calculations, by 2018, the outstanding conventional debt of the central government will be as high as 45% of GDP. This is a result of the continued fiscal deficit of the Chinese government, which we forecast due to mounting government liabilities. The second component of the source of debt is outstanding foreign debt, which is conservatively assumed to be unchanged from today, roughly in the neighborhood of 15% of GDP. The third item is non-recoverable non-performing loans of state-owned commercial banks, which, again conservatively, could be as high as 35% of GDP. Another liability is government pensions, due to the fact that the Chinese government promised to pay pensions to the current working generation. However, the current working generation’s input is diverted to pay for current retirees. As a result, their retiree benefits will have to be paid by the central government. This liability could be as high as 45%. This also partially reflects the aging of the Chinese population. Overall, the total level of debt is shown in Table 4. The debt could be as high as 115% of GDP. This will put China as one of the highest government liabilities, similar to today’s Japan. However, different from governments like Japan and the U.S., the Chinese government has a high amount of assets in the form of state-owned enterprises and other institutions. According to a rough study by Li and Li (2003), the value of assets under the government’s control should be 125-150% of GDP. Examples include government shares in companies such as China Mobile, PetroChina, Sinopec, and so on. When we argue that the total amount of debt will be lower than the projected value of assets under China’s control, the Chinese government will not become a major factor destabilizing the financial sector. We disagree with this view, since the maturity of the liabilities may not be well-matched by the liquidity of the assets. That is, the government assets may not be liquid enough for the government to quickly turn them into funds in order to service its debt. It is very likely that the government will have to continue to issue high amounts of debt in order to maintain the high level of liability. It is unrealistic for the government to gradually convert these assets in order to retire their debt. Therefore, the higher amounts of government liabilities in China in the coming decades should be a factor deserving careful consideration.

  1. Implied Challenges for China’s Financial Reform

There are at least three categories of challenges given our analysis above. The first challenge is to improve the efficiency of DNI, or domestic non-intermediated investment. China’s DNI is of a higher proportion compared to other countries, as shown in Table 1. Obviously, a high level of DNI poses a question of efficiency. Indeed, many indices have shown that China’s DNI has not been particularly efficient. Examples such as the many unsuccessful projects support this theory. In order for China to improve efficiency of total investment, it is desirable to incorporate an increasing proportion of DNI into the financial sector. In general, non-intermediated investments are localized in one enterprise or in enterprises with close relationship to the source of investment. Therefore, the efficiency cannot be as high as that of a well-functioning financial sector. Related to the issue of the efficiency of DNI, China’s financial sector faces the challenge of playing a more active role in improving corporate governance, forcing business to pay its shareholders before making investments internally. In this regard, various regulations and legislations have to be enacted and properly enforced. For example, the various laws regarding merger and acquisitions are not enacted in China, impeding the process of mergers and acquisition. The lack of mergers and acquisitions translates into inadequate pressure on poor managers, causing inefficient investment.

The second category of challenge to financial sector reform is the issue of capital flow. Will China follow the practice of India in opening up capital flow in the near future? The answer is most likely no. There are at least two reasons behind this. The first is given that the Chinese government will continue to accumulate large amounts of liabilities, and that its assets are not as liquid as liabilities, the government will have to rely on household loans. Opening up the capital flow means that the government will have to compete against foreign firms for household savings. This will not only increase borrowing costs, but will also add to uncertainty in its borrowing needs. Another reason is that once China opens up capital flow it is unclear whether the large amounts of DNI will leave China. China’s enterprises may not choose to invest domestically. They may transfer their funds to foreign financial markets. When this happens the Chinese macroeconomy will fluctuate, causing major problems for the Chinese government. The third reason for the unwillingness of the Chinese government to follow India in opening capital flow is Chinese central banks foreign currency reserves will be seemingly too high. As of today, these reserves are number one in the world, other than Japan, in an amount over USD 650 billion. How to manage such a high level of currency reserves? Traditional thinking is these reserves should be invested in liquid assets in order to stand by for unexpected contingencies, especially large amounts of capital flows out of the domestic economy. In the Chinese case, capital control is likely to remain in place.

The third challenge is: how should the government manage capital reserve? There are three major strands of though on this issues. One is to keep the status quo, that is, invest in liquid assets such as U.S. Treasury Bonds, Euro Bonds, and Japanese currency bonds. The benefit is safety, but the drawback is high cost, because these financial instruments offer lower rates of return than Chinese average rate of return to investment. The second line of thinking is to somehow return the currency reserves to private investors or enterprises in China. For example, create a kind of investment fund and let Chinese households buy units of these investment bonds. These are then invested in hard currency overseas. The third line of thinking is to use currency reserves as a strategic investment for the whole country through China’s central bank. For example, part of the reserves can be used for equity shares of multinationals having a high ratio of natural resource reserves. This way the country can hedge the risk of the price increase of natural resources, on which the Chinese economy is increasingly dependent. In any case, whatever China will do with its mounting currency reserves, the whole world financial market will pay particular attention.

Chart 1

Chart 2

Chart 3

Chart 4

Chart 5

Chart 6

Chart 7

Chart 8

Chart 9

Chart 10

Table 1: Net Sources of Finance---1970-94(Percentages)



United Kindom

United States






Bank finance










New equity










Source: Corbett & Jenkinson (1997);
Table 2: A Comparison of Total Investments from Retained Funds as Shares of GDP across Countries







United Kingdom

United States









Retained Funds Investment/GDP








Source: Calculation based on Corbett & Jenkinson (1997) and author’s calculation based on China Statistical Yearbook of various year.

Table 3: Regressions of Domestic Non-Intermediated Investment/Total Fixed Asset Investment: National Data 1980-2004

Table 4: Panel Data Regressions of Domestic Non-Intermediated Investment/Total Fixed Asset Investment: 1980-2004

Random Effect Regression

Fixed Effect Regression




GDP Growth Rate





Share of Non-State Enterprises





Growth Rate of HH Savings















Notes: Provinces included are Beijing, Guizhou, Shanghai, and Sichuan.
Table 5: An Estimate of Chinese Government Debt by 2018
(from Li and Li, Cato Journal 2003)


China Statistical Bureau: China Statistical Yearbook (Various Years from 1985 to 2005.) China Statistical Publisher. Beijing.

Corbett, Jenny and Tim Jenkinson: How Is Investment Financed? A Study of Germany, Japan, the United Kingdom and the United States. The Manchester School Supplement pp. 69-93. 1997.
Kornai, Janos: Economics of Shortage. North Holland Publisher. Amsterdam, Holland. 1980.
Li, David D. Li and Ling Li: “The Pension Reform Debt: A Simple Resolution of China’s Pension System Crisis.” The Cato Journal. V.23, n.2, pp.281-289, Fall 2003.
McKinnon, Ronald: The Order of Economic Liberalization. Johns Hopkins University Press. Baltimore, Md. 1994.

1 Excellent research assistance by FENG Junxin, JIANG Hongping, MEI Song and editorial assistance by Ryan Monarch are grateful acknowledge.

2 We also calculated the consumption level of households, based on statistical bureau surveys, and extract consumption level from disposable income, thus creating total savings of households. We deduct the increase in household deposits from the gross total savings of households, creating the upper bound of informal investment of households.

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