Negative investment in China: financing constraints and restructuring versus growth

This paper addresses an interesting phenomenon in China’s investment pattern: despite high aggregate investment and remarkable economic growth, negative investment is commonly found at the microeconomic level. Using a large firm-level data set mainly made up of unlisted companies, we show that private firms undertake negative investment in order to raise capital. We also find that, owing to overinvestment and misinvestment in the past, state-owned firms have had to restructure by getting rid of obsolete capital in the face of increasing competition and hardening budget constraints. Finally, rapid economic growth counterweighs both effects for all types of firms, with a larger impact in the private and foreign sectors. Thus, the needs to redeploy resources and to overcome capital market imperfections help to explain the negative investment of many Chinese firms.