China’s State-Driven Growth Model Is Running Out of Gas

Latest data suggest China may not match the trajectory of Taiwan, South Korea and Japan

By Greg Ip. Excerpts:

"Absent a change in direction, China may never become rich.

The economy’s growth slowed to 6.2% in the second quarter, a near-three-decade low. That’s still pretty good for a middle-income country"

"official statistics probably paint too flattering a picture. Per-capita income may be a quarter lower than reported, based on a study of nighttime light co-authored by Yingyao Hu of Johns Hopkins University. Alternative data such as tax collections suggest growth was 1.8 points slower than reported from 2010 to 2016"

"since the mid-2000s the government has tightened control over sectors it considers militarily or economically strategic, such as telecommunications. Some Chinese officials “truly believe a dominant state sector is exactly what China needs"

"most of it state-led, and housing, are much more important in China, representing half of total investment, says Dwight Perkins, a China expert at Harvard University. This made sense when the average family’s apartment was just 200 square feet and even its most densely populated regions lacked freeways. Now, though, the average apartment is 800 feet, and new highways and railroads increasingly serve remote areas with less potential payoff. “It’s good for those areas, but the return on that investment has undoubtedly fallen very sharply.”"

"China’s reliance on debt, which, according to Mr. Tilton, is, as a share of GDP, two to four times that of its east Asian peers at similar stages of development."

"China invests just as heavily but far less efficiently than its peers did. It shows: The return on capital plummeted from 19% in 2007 to 8.4% in 2017"

"total-factor productivity, which measures how efficiently labor and capital are deployed, began growing faster in 2016, led by services. But some analysts are skeptical of official data and say productivity growth has been negative for years."

"in recent years, private firms in China have faced multiple headwinds. State-controlled banks prefer to lend to state-owned enterprises, so private firms borrow from less-regulated “shadow banks,”"

"The domestic private sector’s share of total sales has dropped about 5 percentage points since 2016"