As U.S. President Donald Trump prepares to touch down in Beijing on May 14 for a high-stakes bilateral summit with Chinese President Xi Jinping, Chinese officials are ready to lead with one key economic figure to showcase the country’s perceived resilience: an official 5% GDP growth target and performance figure for 2025. But while the 5% target is a stated policy goal, analysts argue that a far more telling indicator of China’s actual economic health lies in an unpublicized metric that reveals deep structural inefficiencies: the Incremental Capital Output Ratio, or ICOR.
ICOR measures how much new investment is required to generate one additional unit of economic output. In a healthy, efficient economy, this ratio remains low, as capital flows to productive, high-return projects. When capital is misallocated — flowing into unneeded infrastructure, unprofitable projects, and overcapacity that cannot be absorbed by domestic demand — the ratio climbs, and in China, it has been rising sharply for decades.
Calculated as gross capital formation as a share of GDP divided by real GDP growth, ICOR is not an official Chinese data point, but it can be derived from public data released by China’s National Bureau of Statistics. During China’s high-growth era between 2000 and 2007, ICOR held steady at around 3.9, meaning 3.9 percentage points of GDP in investment was required to generate 1 percentage point of GDP growth. For comparison, during their own rapid growth periods, South Korea and Taiwan posted far lower ICORs of 3.2 and 2.7 respectively, indicating that even at its economic peak, China’s investment efficiency lagged behind its regional peers.
China’s investment productivity began a steady decline after the 2008 global financial crisis, when Beijing rolled out a massive large-scale stimulus package to offset falling export demand. Between 2008 and 2019, China’s ICOR climbed from roughly 4.5 to 7.2, nearly doubling the pre-crisis baseline. Economists attribute this shift to the exhaustion of China’s easy growth drivers: the most productive coastal manufacturing expansion, cross-regional infrastructure buildout, and rural-to-urban labor migration had largely run their course by the 2010s, leaving less high-return opportunities for new investment.
The upward trajectory of ICOR has only accelerated since 2020. Using China’s official GDP figures, the country’s current annual ICOR stands at approximately 8.5, with a five-year rolling average approaching 9. When adjusted using more conservative, independent growth estimates from the Rhodium Group, a U.S.-based independent research firm that pegs China’s 2025 actual growth between 2.5% and 3%, the implied ICOR jumps to between 14 and 17. Even the most favorable interpretation of official Chinese data confirms a clear trend: the Chinese economy is rapidly losing investment efficiency, fueled by a flood of subsidized credit directed to politically prioritized projects rather than commercially viable opportunities.
Beijing has built a reputation for consistently hitting its pre-set GDP growth targets, so much so that even senior Chinese officials have publicly questioned the legitimacy of the official numbers. Rather than treating GDP as a natural economic output, Chinese authorities treat the target as a non-negotiable policy goal, achieved through directed credit allocation to state-linked entities. State-owned enterprises, local government financing vehicles, and politically connected real estate developers access below-market-rate borrowing that does not reflect underlying project risk, and pour capital into ventures that would fail basic commercial return tests. The end result is a growing pile of excess production and unused capacity that Chinese consumers do not want, created solely to hit arbitrary growth metrics.
Unable to absorb this surplus domestically, Beijing redirects it to global markets, selling goods below production cost and effectively exporting the losses from its domestic capital misallocation to trading partners around the world. This dynamic has major implications for the agenda of the upcoming Trump-Xi summit, challenging the conventional narrative that frames U.S.-China economic relations as a competition between a declining U.S. and a dynamically rising China.
Over the past two decades, the U.S. has maintained a relatively stable ICOR, reflecting an economy where investment and output grow in rough, sustainable proportion. By contrast, China’s economy now requires exponentially more investment to generate every additional yuan of GDP, a structural weakness that undermines claims of inherent Chinese economic strength. China is now structurally dependent on continuous credit expansion and steady export revenues to service its growing debt load and maintain domestic political stability. This means that U.S. trade policy tools such as targeted tariffs can apply direct pressure to the core mechanisms Beijing relies on to manage domestic order, particularly the export revenues that keep its debt system functioning.
That does not mean unilateral U.S. trade action is the most effective strategy, the analysis argues. Instead of walling the U.S. off from global trade alone, Washington should pursue coordinated action with like-minded allies to address the root of the problem: Beijing’s subsidized overcapacity model. Every major global economy is already coping with a flood of underpriced Chinese exported surplus, so a coordinated multilateral framework that targets subsidized overproduction at its source will create far more sustainable leverage than unilateral tariffs, which risk isolating the U.S. from the global partners it needs to enact meaningful change.
None of this data suggests China is on the brink of imminent economic collapse. China’s governing system has already demonstrated a striking ability to manage gradual deterioration: rolling over bad debt, extending repayment timelines, and pushing underlying imbalances into the future rather than addressing them. But managed gradual decline is not the same as economic strength, and Beijing has so far shown no willingness to tackle the core structural imbalances driving falling investment efficiency on its own. While Beijing will continue to tout its 5% official growth figure as proof of economic resilience ahead of the summit, the real metric to watch is the one Chinese officials will not discuss: the rising hidden cost of generating every unit of that growth. This analysis comes from Daniel Swift, a senior research analyst for economics, finance and trade at the Center on Economic and Financial Power at the Foundation for Defense of Democracies, and a retired U.S. diplomat.
