Constructing China's Net Capital and Measuring Capital Services in China, 1980-2010

This paper documents the procedures of constructing industry-level net capital stock and measuring capital services in the Chinese economy. This work is based on our understanding of the major problems in the official investment statistics and follows the system of national accounts (SNA) principles. The main tasks accomplished include reconstruction of industry-level investment flows, estimation of the initial capital stock, measurement of industry-specific deflator and depreciation rate, and construction of net capital stock for 37 industries and estimation of their services. Our results show that China's rapid gross domestic product (GDP) growth has indeed been accompanied by a more rapid growth of capital input. The annual growth of China's net capital stock was 12% for the entire period 1980-2010. We find that despite institutional shocks and substantial restructuring in the early reform period of the 1980s, China managed to achieve an annual growth of over 10% in net capital stock. This was followed by an even faster growth in the 1990s (13%) and a further acceleration following China's World Trade Organization (WTO) entry (17%). Moreover, the unprecedented fiscal package in the wake of the global financial crisis drove up the growth of China's net capital stock to over 20% per annum. However, our estimated changes of capital services using the user-cost weights suggest that, since the late 1990s or early 2000s, there has been unusual substitution towards assets with relatively low rather than high marginal products. This may imply distortions in capital allocation and barriers to capital mobility in the economy.