China Has $5.6 Trillion Productivity Opportunity, McKinsey Says

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A man and a woman ride on an electric scooter past new apartment buildings in Jining, China.

Photographer: Qilai Shen/Bloomberg
  • Zombie company overhaul, development of capital markets needed
  • Household incomes could be boosted by $5.1 trillion by 2030

A productivity overhaul in China could add $5.6 trillion more to the economy by 2030 than the current model of using investment to spur growth. 

Overhauling zombie companies and developing capital markets are among measures needed to unleash the economy’s potential, according to a new study by McKinsey & Co. It estimates that household income would be boosted by $5.1 trillion in the same period if such productivity can be harnessed.

China’s urbanization and industrialization over the past 30 years of super-charged growth lifted 600 million people out of poverty. But more recently the nation’s growth model has become challenged, leading policy makers to grapple for new drivers of demand

QuickTake China's Pain Points

The economy expanded by its slowest pace in 25 years in 2015 and labor productivity -- a measure of output per hour worked -- in the world’s no.2 economy is 15 to 30 percent of the average in Organisation for Economic Co-operation and Development countries, according to McKinsey. Debt has also ballooned to 2.5 times the $10-trillion plus economy’s size.

Over the next 15 years McKinsey estimates that 200 million people may shift sectors from areas such as agriculture and commodities to services and consumer goods.

Reform Areas

Along with allowing more competition and deeper capital markets, areas identified by McKinsey’s study that need a shake up include: corporate restructuring, raising labor force skills to fill talent gaps and enhance labor mobility, boosting demand in the economy and addressing income inequality and raising public-sector effectiveness.  

"This can and will happen," Jonathan Woetzel, director of the McKinsey Global Institute and one of the report’s authors, said in a phone interview. "There’s a lot that could be done more productively."

The productivity challenge isn’t unique to China. Economies around the world have been dogged by weak productivity growth since the global financial crisis, one of the key reasons the global growth outlook remains tepid and global monetary settings so loose.

U.S. Federal Reserve Chair Janet Yellen this week told Congress she’s seriously worried about productivity. The top policy maker noted that it’s not clear what has depressed productivity and cited a slumping rate of business creation and a slower pace of technological change showing up in output data as among the possibilities.

If China doesn’t act, it runs the risk of flirting with a hard landing as capital productivity and corporate returns fall even as debt rises.

"The longer you wait the more expensive it gets," Woetzel said.

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