China’s economy is experiencing a significant slowdown, with growth dropping to just 4.6%, far below the 6.5% rate seen before the pandemic. Concerns are rising over the true extent of the slowdown, as productivity struggles and living standards remain low compared to developed nations.
A key factor contributing to the economic deceleration is China’s falling total factor productivity (TFP), which measures the efficiency of labor and capital in producing goods. While official data reports a decline in TFP over the last 15 years, the issue remains debated. However, there is consensus that productivity growth has markedly slowed.
Economists, including Paul Krugman, have pointed to the real estate sector’s prominence in the economy as a major reason for the slowdown. Since the 2008 global financial crisis, China invested heavily in real estate, a low-productivity industry, which drained resources from more productive sectors.
Additionally, China’s shift away from a resource-driven growth model to one focused on innovation and productivity has proven difficult. While countries like Japan and South Korea transitioned to high-income economies by prioritizing technology and productivity, China is now facing similar challenges as other middle-income nations, such as Thailand.
Another significant issue is China’s demographic shift. The country’s working-age population began to decline around 2010, diminishing the “demographic dividend” that once fueled growth. With fewer young workers entering the workforce and an aging population, productivity has stagnated. Urbanization, which once boosted productivity by moving labor from agriculture to manufacturing, is also slowing, as the surplus labor in rural areas diminishes.
China’s research and development (R&D) sector, while growing, faces efficiency challenges. State-owned enterprises (SOEs) are found to be less productive in R&D compared to private or foreign-owned companies, undermining the effectiveness of the country’s innovation efforts.
As China’s export market faces challenges, including the effects of trade wars and slower global demand, the nation’s model of growth through exports is losing steam. Additionally, China’s consumption rate remains low compared to the U.S., which dampens innovation and product development.
President Xi Jinping has introduced policies like Made in China 2025 to boost technological advancement, but structural issues, including inefficiencies in R&D and a shifting demographic landscape, continue to weigh on productivity. Whether these measures can effectively restore China’s economic momentum remains uncertain.
