You Shouldn’t Depend on China to Increase Global GDP.

Once upon a time, China's economy could frequently provide 12% to 15% annual growth, enough to add up to 2.5 percentage points to global GDP growth. Some people are hoping for this today, as China's economy reopens after two years of Covid-containment regulations.

Whether seen through the lens of capital or labor, the math doesn't support the case for China "rebounding" from its current 2% GDP growth rate to a pace strong enough to raise global growth and commodity prices.

Any "pivot" in China's GDP growth is unlikely to occur before the end of the year. In less than a year, no country has recovered from the Covid epidemic. When China's economy recovers, growth will likely disappoint rather than amaze optimists.

One method to assess China's economic potential is to look at productivity and labor-force growth. Last year, China's statisticians shocked everyone by declaring the country's first-ever population fall. More people produce more goods. What matters in terms of GDP is the working-age population. China's National Bureau of Statistics announced a larger-than-expected addition of 12 million individuals to the nonfarm workforce last year, more than double the average growth over the previous three years. From 2001 through 2014, yearly gains in the nonfarm workforce ranged to 19 million.

However, when the nonfarm workforce grew from 363 million to 543 million, those increases indicated a decreasing percentage contribution: In 2004, the 19 million increase in nonfarm employees represented 5.1% of the working force. In 2013, a similar increase of 3.7% occurred. The 12 million increase from the previous year was merely 2.1%.

Productivity (GDP per worker) has also slowed. Productivity growth plummeted from 9%-plus in the post-WTO period to 4.5%-plus in the pre-Covid years. So, if productivity rebounds this year after nearly no improvements in 2021-22, and if the government can organize another large migration off the farm, GDP growth of 6% or more is feasible. This is three percentage points higher than experts predict, but it would add less than 0.5 percentage points to global GDP growth.

Another method to measure China's economic potential is to look at investment, which doubles GDP growth. The spending on constructing a factory, bridge, roadway, or rail line contributes to GDP. Such investments also produce a return in later years. The return on investment, on the other hand, falls with each subsequent initiative. A second road costs the same as the first, but it connects the second-largest industrial center to the port, generates a lower return, and contributes less to GDP in the future.

In China's expanding economy, the investments with the highest rates of return have been prioritized. After decades of modernization, today's investment projects produce lower annual rates of return and contribute less to future GDP development. Public policy has recently prioritized investment in owner-occupied housing. Unlike a factory, such a dwelling contributes nothing to GDP after it is created. As a result, the growth boost from the investment has been diminished.

China's economy is slowing, whether measured by the marginal output of work, the labor force, or the marginal efficiency of capital. China's GDP growth rate would have to be increased by six percentage points to add one percentage point to global GDP growth. That is most likely unreachable.