The Flexible Acceleration Mechanism of China’s Capital Adjustment with the Goal of Consumption-Driven Sustainable Growth

Peng Su, Xiaochun Jiang and Wei Sun
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Peng Su: School of Management, China University of Mining and Technology, Xuzhou 221116, China
Xiaochun Jiang: Center for Quantitative Economies, Jilin University, Changchun 130012, China
Wei Sun: Center for Quantitative Economies, Jilin University, Changchun 130012, China

Sustainability, 2018, vol. 10, issue 3, 1-20

Abstract: China has had an investment-led growth pattern that is unsustainable. It is struggling to shift to a consumption-driven economy, and capital adjustment is crucial to the transition. In response, the principal objective of this study is to analyze the internal market mechanism of China’s capital adjustment. Due to the imperfections of the market, we use the flexible acceleration model, which we put in an IS (Investment – Saving equation)–LM (Liquidity preference – Money supply equation) framework in order to reflect the guiding role of demand. The results show that the flexible acceleration model fits China’s investment well, and the demand-oriented market mechanism of capital adjustment has been formed; however, China’s market adjustment ability is not strong. The adjustment coefficient is only 0.22, and shows a decreasing trend. So, in the capital optimization process, relying on the market alone is not realistic. Furthermore, the calculated replacement rate is up to 0.429, which indicates that China’s capital is less efficient, and there are duplicated assets, idle assets, and wasted investments. The error correction model’s results show that the impact of the interest rate on the investments is not significant in the short term, so the existence of invalid capital is more likely to stem from the soft budget constraints, which require attention.

Keywords: sustainable growth; capital adjustment; consumption-driven; flexible acceleration; IS-LM model (search for similar items in EconPapers)
JEL-codes: O13 Q Q0 Q2 Q3 Q5 Q56 (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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