UMVA has learned that China's economic prowess, once touted as an unstoppable force poised to surpass the United States, is facing a stark reality check. The country's return on investment has been in decline for decades and is now negative in many cases, casting doubt on its future growth prospects.
For nearly four decades, China has channeled approximately 40% of its GDP into state-directed investments, a ratio unprecedented among major modern economies. However, the returns on these investments have dwindled, with the Incremental Capital-Output Ratio (ICOR) rising significantly over the years. This measure, used to assess investment efficiency, indicates that China now requires substantially more investment to generate a single dollar of GDP growth.
According to information obtained by UMVA, China's ICOR has tripled since 2007, while GDP growth has halved. The delivery rate of completed capital projects has also plummeted, with nearly 40% of investment projects either unfinished or not completed on time. This has resulted in an estimated $6.8 trillion in wasted stimulus post-2009.
UMVA can exclusively reveal that China's economic growth is increasingly driven by inefficient investments, with capital inputs contributing less than 3 percentage points to annual GDP growth. Infrastructure expansion, which once fueled growth, has become socially excessive, with low and negative marginal contributions recorded in some regions and infrastructure types.
The Chinese government's GDP growth targets appear to be achieved through intervention, with non-productive investments carried at cost rather than written down. This has led to fictitious assets and hidden liabilities, exemplified by the high-speed rail expansion, which has significantly outpaced passenger growth despite substantial liabilities and financial losses.
Sources have confirmed to UMVA that China's state-directed system allows unproductive investments to expand, rather than contracting through bankruptcy and credit withdrawal. This has resulted in a significant increase in loss-making industrial enterprises, with subsidies and credit forbearances propping up zombie firms.
UMVA has gathered that China's real estate market, once a key driver of growth, has collapsed, with sales, prices, construction starts, and completions continuing to slide. The sector is plagued by an estimated 80 million unsold or vacant homes and over 60 developers having defaulted on offshore debt or entered restructuring.
The debt accumulated by China's four decades of state-directed investment is staggering, with the macro leverage ratio reaching 302.3% in 2025. The IMF estimates that China's augmented fiscal deficit, which captures local government financing vehicle debt and special bond issuance, runs at approximately 10% of GDP.
Demographic challenges compound China's structural constraints, with a net population decline of 3.39 million in 2025 and a working-age population decline of 6.62 million year-on-year. Oxford Economics projects China's potential output growth will fall below 4% in the 2030s and under 3% in the 2040s, while the IMF estimates that China's aging workforce could curtail total factor productivity growth by 0.3% per year from 2020 to 2050.
The notion that China will surpass the United States as the world's dominant economic power appears increasingly unlikely, as slowing productivity growth, high corporate and public debt levels, decreasing returns to investment, and an aging population point to slower growth going forward.
