| Abstract | Investment plays a pivotal role in China’s economic growth. The high and increasing investment rate is accompanied by increasing capital returns since 1998. This paper investigates what drives capital return increases. Theoretically, capital return is determined jointly by total factor productivity, labor-capital ratio, capital share, real interest rate, and financial constraints. Empirically, we find increases in China capital return are mainly due to improvements in total factor productivity and decreases in real interest rate and financial constraints. Besides, labor-capital ratio, business cycle fluctuations, international trade, and government consumption also have significant effects on capital return. On the other hand, capital output ratio, SOE ratio, infrastructure stock, and agricultural labor productivity do not display significant and stable effects. |