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Abstract:Since the process of economic reform began in 1978, there have been five periods during which the Chinese government implemented contractive measures intended to slow down the economic growth. The main reason why macro adjustment policies were necessary was because of over-investment in the state-owned segment of the economy that was causing the economy to overheat. The key factors behind this over-investment were the fact that the market mechanism was still not operating properly in China and the lack of clarity regarding property rights. In order to explore the impact that ill-defined property rights and an improperly functioning market mechanism have had on over-investment in China, this study tries a mathematical model, to analyze the reason why such over-investment behavior happens easily in state-owned enterprises.