China’s Return on Capital and Real Interest Rates in Relation to Investment

Since the adoption of the policy on reform and opening up in 1978, investment has played a direct and important role in China’s rapid economic growth. Chinese scholars extensively debated the sustainability of China’s investment-driven growth model. From the perspective of labor migration, some studies identified high investment and high return on capital (ROC) as China’s intrinsic economic growth phenomena. On the basis of calculating return on capital, this chapter will verify the relationship between investment and return on capital minus interest rate referencing Knut Wicksell’s theory to empirically support the conclusions of such theory and test the relationship between investment and interest rate. Most existing studies on return on capital have been carried out from global and regional perspectives, and some studies have identified the efficiency loss arising from factor price distortions. From a sectoral perspective, this chapter will focus on observing return on capital in resource sectors and further identify whether differences in return on capital in those sectors will influence monetary policy.