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The most striking thing is that China has maintained a high rate of investment in the context of the rapid growth of China’s economy. The calculation based on the data released by the National Bureau of Statistics showed that China’s investment rate was never lower than 30% from 1980 to 2014, averaging 39.4%. In the 21st century, China’s investment rate has risen further, close to 50% recently, far higher than that of other countries in the world and almost twice the world average (see Figure 1.2). China’s high amount of investments has not only supported the rapid economic growth but has also aroused widespread concerns about the economic structural imbalance and sustainability. Therefore, it is more worthwhile to further study and analyze why China can maintain such a high rate of investment for a long term. In the world, the problem facing most countries is always an insufficient amount of investments rather than the high rate of investment. In other words, it 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.