No, China isn’t going to take over the world.

If you thought it was, take a look at the dull but important new paper on the country’s history of productivity growth at the link below.

The paper sets out China’s extraordinary record on productivity growth over the past 40 years. At its root was the move out of agriculture and into — in particular — manufacturing, as described in How Asia Works.

In the 1990s, Zhu Rongji kept the game going by laying off state workers and greatly increasing competition among state-owned firms. Contrary to what many economists (such as those who advised Russia) expected, state firms began to quickly close the productivity gap on private firms. It turned out that competition was much more important than ownership.

Productivity gains remained strong in the early 2000s as China’s economic boom came to the world’s attention.

In the past decade, however, the data show that China’s model hit the buffers. After the global financial crisis, more and more investment went into infrastructure and real estate with low productivity gains. State enterprises sucked up easy credit and stopped catching up the private sector in terms of efficiency. And rates of bankruptcy remained low, preventing the exit of less efficient firms, which is an important longer term driver of productivity gains in any highly productive economy.

I have mentioned before that Xi Jinping reminds me of South Korea’s last autocrat, Chun Doo Hwan. As a corollary of the collapse in productivity growth, the credit picture in China is also beginning to resemble Korea in the mid-1980s as smaller, weaker banks and non-bank financial institutions take a much bigger share of financial system assets and make riskier loans to less productive activities. As the paper notes, the Big Four Chinese banks’ share of bank system assets has fallen from more than half before the global financial crisis to well under two-fifths today.

China’s total factor productivity is still less than half that of the United States. There is no reason why China could not catch up, but to do so it would have to change policies on competition and economic openness that just aren’t going to be changed by the Communist Party of China. And that is why China isn’t going to take over the world, or indeed anything close.

Chinas-Productivity-Slowdown-2020 clean

4 Responses to “???????”

  1. intajake Says:

    smaller, weaker banks and non-bank financial institutions take a much bigger share of financial system assets and make riskier loans to less productive activities”

    I find this assertion odd,Germany has a great distributed banking system that isn’t concentrated they have an excellent world class industrial system and amongst the worlds highest productivity.

    UK on the otherhand has a highly concentrated banking system and far worse productivity. The banking system infact ignores SME’s and mostly focuses on mortages.

    I’m not sure at all that a highly concentrated oligolopistic supports productivity growth.

    Germany certainly indicates that a highly distributed banking system,supports productivity growth.

    • joestudwell Says:

      You are correct that a distributed banking system does not of itself lead to problems. The issue in China is that loan assessment and prudential supervision at newer city commercial and joint stock banks is not from the same banking world as what you find in Germany. China needs a less centralised banking system to increase competition and improve service, however it is a horrible challenge to transition to this as the experiences of Japan, ROK and Taiwan already showed. Thank you for the comment.

  2. Gregory Shein Says:

    Sorry, could you explain why wouldn’t communist party just let the small banks fail and nationalize them in some form? If anything communists should be good at nationalizing stuff.

    • joestudwell Says:

      This has long been China’s approach. The problem is that the small banks are not so small any more, so if and when they go bust it is a lot more expensive.

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