This Is China’s Real Economic Problem

China bulls could be forgiven for some self-­congratulatory back-patting these days. The country’s gross domestic product expanded 6.9 percent in the first three months of the year, the fastest rate since the third quarter of 2015. China is showing “marked improvement in economic performance, and major economic indicators have continued to move in a positive direction,” Premier Li Keqiang told global business leaders at a World Economic Forum meeting in Dalian on June 27.

But one key indicator—total factor productivity—gives a more worrisome picture of China’s economic health. Total factor productivity is the extra output that the economy produces without additional labor or capital—it’s what creates prosperity. While productivity in the manufacturing industry grew an average of 2.6 percent a year from 1998 to 2007, growth has been almost zero since, according to Loren Brandt, a China specialist at the University of Toronto. In the U.S., by contrast, productivity growth fell from 1 percent to about 0.5 percent over the same period, he says.