Investment and economic growth: a dilemma in China

The correlation between China's investment rate and economic growth rate has changed from positive to negative in recent years, and the topic of investment efficiency and overinvestment has regained attention. Based on China's special institutional arrangements of promotion tournament and considerable discretion in local policy implementation, this article collects national and provincial panel data from 1978 to 2022 and establishes four main findings. First, the increase in investment rate stems in part from the pressure to 'secure growth'. Second, the negative impact of capital user cost on investment is manifested only before 2007. Third, interregional interaction is very important for provinces' investment behaviors. Finally, while high investment rate accumulates more capital, it has an adverse effect on the overall productivity. In summary, the Chinese experience of the 'double-edged sword' shows that investment in relation to economic growth should be maintained at an appropriate level.