Study on the Impact of Economic Growth Targets on the Return on Capital in China's Real Economy

Abstract

Economic growth is a common goal pursued by various countries and regions, and among various economic sectors, the real economy is the foundation of a country's economy and is directly related to productivity and the actual level of development of the national economy, while the return on capital is an important indicator of the development of the real economy and responds to the profitability of market players, and in the face of the current pressure of demand contraction, supply shock and expected weakening of China's economic development. This paper theoretically analyzes the mechanism of the impact of economic growth targets on the return on capital of the real economy and empirically examines it using panel data of 30 provinces, autonomous regions and municipalities directly under the central government in China over a total of 18 years from 2003 to 2020. It is found that the impact of economic growth targets on the return to capital in the real economy is inverted U-shaped in terms of national data during the examined period, i.e., the return to capital in the real economy increases and then decreases as the economic growth targets are continuously increased. The results of the heterogeneity test show that the economic growth target has different effects on the return to capital of the real economy in different regions, among which, the relationship between the change in economic growth target and the change in the return to capital of the real economy is consistent with the inverted U-shape in the central and western regions of China, but the relationship is not significant in the eastern regions of China. The results of the intermediate effect test show that the economic growth target affects the return to capital of the real economy through government intervention, and also affects the return to capital of the real economy through fiscal pressure and other mechanisms of action. The purpose of this paper is to investigate the impact of changes in economic growth targets on the return to capital of the real economy and its transmission mechanism, and the findings of the study can provide a reference for setting economic growth targets with full consideration of the need for long-term sustainable development, focusing on innovation and avoiding over-reliance on short-term benefits and financial markets.