The prosperity of any economy relies on a variety of factors that drive productivity. One way of measuring these elements is by examining competitiveness, which the World Economic Forum (WEF) defines as “the set of institutions, policies and factors that determine the level of productivity of a country.” Importantly, a country’s economic output is highly dependent on the overall well-being of its population and the robustness of its legal institutions.

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Pillars of Economic Competitiveness

Perhaps the most visible component of China’s global competitiveness is the size of its economy. Measured in terms of purchasing power, China produced roughly $21 trillion worth of goods and services in 2018, almost $3 trillion more than the US and $16 trillion more than Japan. Although the relationship between market size and productivity is multifaceted, the demand for Chinese goods has been at the heart of China’s economic success story.

While impressive in scale, China’s financial system struggles with challenges that hinder its economic potential. Many of the roadblocks that China faces are rooted in its high savings rate. According to the WEF, gross savings as a percent of GDP in China is the second largest in the world at 46 percent, behind only Brunei at 57 percent. This rate of savings is even more notable when compared to the developed economies of Europe and North America. In 2017, Germany’s savings-to-GDP ratio was 27.6 percent; in the US, savings amounted to just 18.6 percent of GDP.

Top Five Countries in GCI Overall Rank Country Market Size Rank GDP PPP per capita 1 USA 2 $59,532 2 Singapore 27 $93,905 3 Germany 5 $59,639 4 Switzerland 39 $64,712 5 Japan 4 $43,279 28 China 1 $16,807 Source: Global Competitiveness Index

Ample savings can provide the necessary capital needed to support economic development. Both foreign and domestic investments in the Chinese market are controlled by Beijing, as is much of the country’s banking industry. This enables Chinese leaders to leverage the resources of China’s banks toward making credit readily available to investors. This model has made it possible for Beijing to direct investment capital into hard and soft infrastructure projects, and contributed to China’s emergence as a global leader in research and development.

China has made considerable progress in establishing itself as a pioneer in emerging industries. Learn more about its investments in research and development. Explore More

Yet, China’s high savings rate also creates problems. Over the past decade, Chinese firms have rapidly accumulated debt as a result of over-borrowing and decreasing value-added output per capital invested. Specifically, China’s Incremental Capital Output Ratio (ICOR), which measures how much capital input is needed per extra unit of output, tripled for the corporate sector between 2009 to 2017.

Ready access to credit has created stressors elsewhere. Between 2007 and 2018, China’s household debt increased nine-fold while nominal household incomes merely tripled. Some have argued that the debt generated by mortgage lending exposes China to risks that could compromise its macroeconomic stability (should the housing bubble burst and prices drop).

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The risks associated with China’s credit issues contributed to the S&P lowering China’s credit rating from A+ to AA- in September 2017. At the time the S&P noted that “China’s prolonged period of strong credit growth has increased its economic and financial risk.”

Beijing is also working to reign in capital flight as a result of Chinese investors seeking out lucrative opportunities overseas. If not controlled, high levels of capital flight can reduce the availability of financial resources needed to drive economic growth. In 2017, China enacted several measures to curb capital flight, which include capping overseas withdrawals and limiting foreign exchange purchases by non-government entities. These efforts continued in 2018 as trade frictions with the US intensified. While these policies may prove effective at reducing capital flight, they may also discourage foreign investments and hinder domestic competition.

A more permanent solution to China’s credit worries may lie in increasing domestic consumption. Developing a robust services sector, in particular, could help reduce credit-fueled investments and form the bedrock of sustainable growth in the medium-term.

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The Backbone of China’s Competitiveness

A healthy labor force is essential to the competitiveness and productivity of an economy. Historically, China has relied on its massive population to fuel manufacturing-led development. Yet as China’s population ages and its leaders seek to cultivate innovation-based growth, it must tackle acute challenges that could diminish labor productivity.

China’s economic development has enabled its leaders to dedicate considerable resources toward raising the living standards across the country. Health expenditures in China rose from 3.51 percent of its GDP in 1995 to 6.36 percent in 2017. This growth is all the more remarkable when considering the growth in China’s GDP, which rose from $735 billion to $12.24 trillion over the same period. These investments have helped drive up life expectancy rates and greatly reduce incidences of infant mortality.

Cultivating a large, healthy workforce has been critical to China’s economic development. However, declining birth rates now threaten to curb China’s future economic prospects. The elderly population of China is projected to double to 20 percent of its total population by 2037, which could dramatically limit its productivity.

Share Annual Natural Population Growth Rate from Early 1970s and Infant Mortality Rate

Efforts by Beijing to address this concern, including the relaxing of the one-child policy in 2015 and raising the retirement age to 65, have proven to be too little too late. The urgent need to address this labor force gap has in part compelled China to invest heavily in robotics. President Xi Jinping has called for a “robot revolution” to help drive industry through automation. In 2017, China installed some 138,000 industrial robots – more than any other country.

Chinese leaders are also seeking to cultivate a well-educated labor force to help drive innovation and support China’s fledgling services sector. This approach relies on developing a strong employment infrastructure, supported by benefits like minimum wages and severance packages, which can improve productivity.

As of 2018, however, the WEF rated China’s labor market 69th in the world. This tepid rating is largely a consequence of Chinese workers being unable to advocate for higher wages and benefits.

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On a more positive note, China’s commitment to providing basic education to all its citizens is paying dividends. Official government figures state that the country’s primary school enrollment rate is at 100 percent. Nevertheless, when considering the overall skills of the labor force, the 2018 GCI ranks China (63rd overall) well below most OECD countries, but ahead of developing peers like Mexico (86th) and India (96th).

China also lags other major economies in terms of higher education. Of the top 400 universities listed by the 2018 Times Higher Education World University Rankings, only 12 were located in Mainland China. China’s weakness in cultivating the talent needed to drive innovation is reflected in the GCI, which rated the skills of its future workforce as only 57th globally.

Chinese leaders are increasingly looking to infuse the country’s labor supply with talent from overseas. Part of this push includes fast-tracking visas for foreign specialists, such as leading scientists and business leaders. A proposal has also been floated that would create a special green card aimed at attracting ethnic Chinese with foreign nationality. This push has helped China jump to 23rd in the 2017 GCI’s ranking for its ability to attract foreign talent – up from 27th in 2014. Nonetheless, China still has a long way to go before matching well sought-after innovation hubs like the UK (3rd) and the US (5th).

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Perhaps most importantly, China still faces a host of poverty-related issues. Tens of millions of Chinese still fall below the poverty line set by the Chinese government, which is defined as living on less than 3,000 yuan ($453 in 2018) per year. High incidences of poverty reduce a country’s economic prospects by undercutting labor productivity. Beijing has set in motion a series of policies designed to improve the socio-economic conditions for its most impoverished citizens. These efforts include the goal of “eradicat[ing] poverty in China” by 2020.

Governing Productivity and Competitiveness

Strong legal institutions, such as intellectual property (IP) rights regimes, serve to protect business investments and bolster overall productivity. In the absence of such assurances, stakeholders may be deterred from investing. Poor governance and over-regulation can similarly stifle investment and raise the cost of doing business.

Beijing finances projects with relative efficiency, especially given the size of the economy, which has paved the way for the rapid build-up of hard infrastructure needed to enhance connectivity and boost economic output. The 2017 GCI ranks China 19th in terms of its efficiency in government spending – considerably higher than some developed countries like the UK (27th) and Canada (36th). Other large, advanced economies fare much better, including the US (3rd) and Germany (6th).

Leaders in IP Protection Rank GCI (Out of 140) International IP Index (Out of 50) 1 Finland United States 2 Switzerland United Kingdom 3 Singapore Sweden 4 Luxembourg France 5 United Kingdom Germany – China (49) China (25) Source: Global Competitiveness Index, International IP Index

China has also historically struggled to safeguard intellectual property rights. Strong IP protections ensure that companies and entrepreneurs are rewarded for their often risky investments in creating new and innovative products. The WEF pegs China in the middle-third globally in IP protections (49th out of 140 economies), well behind Western counterparts like the United States (13th) and Germany (21th), as well as commodity-driven economies like Saudi Arabia (31th).

This weakness is mirrored by the annual International IP Index released by the US Chamber of Commerce Global Innovation Policy Center (GIPC). Based on 40 indicators analyzed by the GIPC that “benchmark activity critical to innovation development,” China earned a score of 21.24 out of 45 (higher is better) – placing it at 25th out of the 50 nations surveyed. Each of the five highest rated countries in the index are located in either Europe or North America, with the US (42.66) and the UK (42.22) earning the top two spots.

The GCI ranks China 18th in “burden of government regulation,” ahead of Japan (32nd), but behind the US (4th).

Chinese leaders are actively working to strengthen IP protections. More comprehensive IP laws are already on the books, but enforcement of these regulations has proven challenging. It is also worth noting that in its latest round of government restructuring in March 2018, the regulatory powers and operational scope of China’s State Intellectual Property Office were considerably expanded.

In terms of regulations, China imposes a low regulatory burden on its firms, which has enabled its companies to dedicate more resources toward business development. The 2018 GCI ranks China 18th in “burden of government regulation,” ahead of developed neighbors such as Japan (32nd) and South Korea (79th), but behind the United States (4th).

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Another way of assessing the impact of regulations is by considering measuring the time needed to start a business. Countries like the UK and US, which actively work to limit bureaucratic inefficiencies, have streamlined business creation processes. In 2018, the World Bank reported that the average time to start a business in China was 8.6 days. This represents a significant improvement from 22.9 days in 2017 and is much shorter than the global average of 21 days. This level of efficiency is similar to that of Germany, which requires 8 days, but is still longer than the 4.5 days needed to start a business in the UK and 5.6 days in the US.

China has worked to cut bureaucratic red tape, as witnessed by the drop in the number of start-up procedures needed to start a business from 11 in 2013 to 4 in 2018, but obstacles persist. Companies must still wrestle with time-consuming administrative procedures, particularly those associated with registration and licensing. The ongoing trade war with US may have also increased some of these regulatory hurdles. As China works to transition toward innovation-based growth, it will need to enact policies that quickly and efficiently reward entrepreneurs working to push the country’s economic development forward.