China’s return on investment has declined steadily and is now negative in many cases. Economic indicators suggest the Chinese economy will never overtake the U.S. economy. Photo courtesy of The Borgen Project.
China’s economy is often described as an unstoppable force that will inevitably displace the United States as the world’s dominant economic power. However, this belief is not supported by the data.
For roughly four decades, China has channeled approximately 40 percent of GDP annually into state-directed investment, a ratio with no precedent among major modern economies. The World Bank puts China’s gross fixed capital formation at 40.45 percent of GDP in 2023, against a U.S. figure of 21.6 percent. What that investment once produced in growth, it no longer delivers.
Investment is beneficial if it yields a return, but China’s return on investment has been declining for decades and is now negative in some cases. The measure economists use to assess investment efficiency is the Incremental Capital-Output Ratio, the amount of investment required to generate one additional dollar of GDP growth. Research documented by Fortune shows China’s ICOR rose 50 percent, from 2.6 during 1979–1996 to 4.0 during 1997–2013, meaning that before 1997 China needed $2.60 in investment to generate one dollar of GDP growth, against $4.00 in the later period.
Brookings finds the ICOR has since tripled from 3 to 9 since 2007, while GDP growth has fallen by half. The same researchers found the delivery rate of completed capital projects had fallen below 60 percent from 74–79 percent in the late 1990s, with nearly 40 percent of Chinese investment projects either unfinished or not completed on time, and estimated that ineffective investment had cost China $6.8 trillion in wasted post-2009 stimulus alone.
Capital Economics confirms that China’s ICOR has soared in recent years as investment has become increasingly inefficient. Capital inputs now contribute less than 3 percentage points to annual GDP growth, down from nearly 6 percentage points earlier in the prior decade, per the Federal Reserve Bank of New York’s Liberty Street Economics.
A peer-reviewed analysis published in the Journal of Development Economics found that infrastructure expansion accounts for 14 percent of China’s average annual growth rate over the period 2003–2016, but the expansion was socially excessive for nearly the entire period, with low and negative marginal contributions recorded for some regions and infrastructure types, per a separate ScienceDirect study.
The Carnegie Endowment concludes that China’s GDP growth is an input, a number decided early in the year and then achieved through whatever intervention is necessary, with non-productive investment carried at cost rather than written down, converting losses into fictitious assets, per a second Carnegie analysis. High-speed rail illustrates the point: expansion has significantly outpaced passenger growth, despite the 6 trillion yuan in liabilities and continuous financial losses at the China State Railway Group, per Stanford’s FSI China Briefs.
In a market economy, unproductive investment contracts through bankruptcy and credit withdrawal. In China’s state-directed system it expands. Rhodium Group’s China Pathfinder Q1 2024 documented that subsidies and credit forbearances raised the share of loss-making industrial enterprises from 15 percent in 2021 to 22 percent in 2023, with the March 2024 Government Work Report showing no sign of changing course. Researchers at the Federal Reserve Bank of Dallas estimated that the share of zombie firms across the broader economy reached 16 percent in 2024, up from 5 percent in 2018, with the real estate sector particularly distressed, figures cited and confirmed by the Atlantic Council, which reported the Dallas Fed finding that roughly 40 percent of bank loans to the real estate sector in 2024 went to companies whose operating earnings could not cover their interest obligations, up from just 6 percent in 2018, with most loans rolled over rather than recognized as losses.
Stanford’s FSI China Briefs documents that China’s banks allocate 80 percent of loans to state-owned enterprises, which show higher levels of bad debt than private firms, a pattern established through analysis of over 300,000 business loans issued by 1,500 branches of a large Chinese state bank between 1997 and 2010.
The IMF’s 2024 Article IV assessment found that corporate leverage and indebtedness indicators are highest for central SOEs, with an aggregate liability ratio of 66 percent of total assets in 2023. A State Council report submitted to the National People’s Congress, confirmed by Global Times, records non-financial SOE combined liabilities at RMB 260.5 trillion at end-2024, against China’s nominal GDP of approximately RMB 134 trillion.
The real estate market, which once anchored the investment model, has collapsed. The Atlantic Council reports the slump is in its fifth year with no recovery in sight, sales, prices, construction starts, and completions continue to slide, with an estimated 80 million unsold or vacant homes and more than 60 developers having defaulted on offshore debt or entered restructuring. Between 2024 and 2025, investment in real estate development fell 10.6 percent. Government-linked developer China Vanke posted a record ¥49.5 billion ($6.8 billion) loss for 2024, and Evergrande was delisted from the Hong Kong Stock Exchange following court-ordered liquidation.
The debt accumulated by four decades of state-directed investment is without parallel. China’s macro leverage ratio reached 302.3 percent in 2025, per the National Institution for Finance and Development. The IMF’s Article IV Consultation puts the figure at 312 percent of GDP in 2024, up from 245 percent in 2019, placing China among the most indebted countries in the world. The Carnegie Endowment notes that China accounts for more than half of the increase in the global economy’s debt-to-GDP ratio since 2008. Total U.S. public and private debt stood at approximately 265 percent of GDP in 2024, down from pandemic-era highs, per the BEA.
Those figures exclude the off-balance-sheet debt Beijing has systematically kept off government books. Local Government Financing Vehicles, entities created by local governments to borrow outside Beijing’s annual debt quotas, carry hidden liabilities the IMF estimates at RMB 60 trillion ($8.4 trillion), approximately four times the RMB 14.3 trillion Beijing’s Finance Ministry acknowledges. BBVA Research places the figure higher, at RMB 78 trillion as of Q3 2024, equivalent to 58 percent of China’s GDP. Broad shadow banking assets rose to RMB 53.3 trillion in 2024 from RMB 49 trillion in 2023. China’s augmented fiscal deficit, which captures LGFV debt and special bond issuance excluded from the official 4 percent figure, runs at approximately 10 percent of GDP according to Fitch, which downgraded China’s sovereign rating from A+ to A in 2024.
The gap between the two economies is visible in every per-capita measure. World Bank 2024 data puts U.S. GDP per capita at $84,534 against China’s $13,303, a ratio of 6.4 to 1. The consumption gap is wider. U.S. personal consumption expenditure per capita reached $58,501 in 2024, per the Bureau of Economic Analysis, against $4,802 in China per the National Bureau of Statistics, a ratio of approximately 12 to 1. The structural reason is that Chinese households consume only 39.1 percent of GDP against approximately 70 percent in the United States, meaning a far larger share of what China produces goes to investment and government spending rather than household income. The U.S. generates 2.8 percent annual growth investing 21.6 percent of GDP; China reports 5 percent growth investing nearly double that share.
China’s growth rate has been decelerating for over a decade. A decade ago China posted 7–8 percent annual growth against U.S. growth of roughly 2–2.5 percent, a differential of 5–6 percentage points.
Demographics compound every structural constraint. In 2025, China recorded 7.92 million births against 11.31 million deaths, a net population decline of 3.39 million. The working-age population (16–59) fell by approximately 6.62 million year-on-year and now accounts for 60.6 percent of the population, per the China NBS. Oxford Economics, cited by Newsweek, projects China’s potential output growth will fall below 4 percent in the 2030s and under 3 percent in the 2040s. The IMF estimates that China’s aging workforce could curtail total factor productivity growth by 0.3 percent per year from 2020 to 2050. China’s fertility rate was estimated at 1.2 births per woman in 2024, well below the 2.1 replacement level, per the UN World Population Prospects 2024. CSIS ChinaPower projects China’s population will shrink by over 100 million by 2050.
The case that China will surpass the United States rests on extrapolating past growth rates into a future where the conditions that produced them no longer exist. The investment model is generating diminishing and in some cases negative returns. The debt is compounding. As the IMF’s 2025 Article IV stated directly, slowing productivity growth, high corporate and public debt levels, decreasing returns to investment, and an aging population, taken together, point to slower growth going forward.
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