Analysing the determinants of China's aggregate investment in the reform period

Although investment has played an important role in China's phenomenal economic growth over the last two decades, there has been little research on investment determination at the macro level. This study sets out to explore and explain the factors that influence China's aggregate investment measured by the fixed capital formation during the reform period and to draw useful conclusions from analysing these determinants. The investigation is based on an assumption that aggregate investment in China is determined by both the cost of investment and the increasing aggregate demand created by the reforms. A dynamic investment function is developed to simultaneously capture the long-run and short-run properties of the investment behaviour. The empirical results based on a panel data set of 28 Chinese provinces and autonomous regions suggest that a homogenous equilibrium correction mechanism exists in China's aggregate investment process.