Overinvestment in the Chinese Economic System

Abstract This paper aims to throw light on the problem of overinvestment in China which arose from basic aspects of the Chinese economic system. Making use of a risk yield retained model, this paper attempts to determine the reason for Chinese investment despite evidence of disorder and waste in the period under review. Chinese sources are used to provide evidence for the research into the results of national accumulation, new fixed assets, investment by sector and national income from the basic construction system. In order to eliminate overinvestment, China is now reshuffling the system: from state subvention to bank loan for investment funds; from free charge to an imposition of user tax for the occupation of fixed assets ; from profit-surrending schemes to profit-sharing measures for net earnings of the state enterprises. As a result, the extent of profitability in relation to demand market, production scale and investment cost becomes the key factor in the decision-making process of Chinese enterprises.