China Center Special Briefing Paper: Assessing “Returns on Capital” in the Chinese Economy

Examining China’s performance with respect to “returns on capital” is, along with productivity, an important lens for assessing China's growth quality and sustainability. This paper summarizes Professor Harry X Wu’s study of the Marginal Product of Capital for the Chinese economy over the long run.

The study shows that, from an international perspective, China’s capital-to-output ratio is comparatively much higher and its rate of “diminishing returns to capital” is comparatively much faster, indicating acute inefficiency in Chinese capital investment, especially during the last decade. Ongoing investment-centric stimulus measures need to give way to capacity consolidation and substantially reduced investment for a period, which would enable absorption of previous investment and resolution of accumulated debt from nonperforming investment, even at the expense of short-term growth.