When President Donald Trump arrives in Beijing on May 14 for his summit with Xi Jinping, China will be ready with a figure – 5%.
That is China’s official GDP growth rate and growth target for 2025, and it will be presented as evidence of economic resilience. The target is real. Whether that figure measures economic resilience is a different question.
There is a better metric to watch. It is called the Incremental Capital Output Ratio, or ICOR, and it measures how much additional investment is required to produce one additional unit of economic output.
When an economy is healthy, the ratio stays low. When capital is wasted — when investment flows into projects that don’t pay off, when supply chases demand that doesn’t exist, when the excess is dumped on other countries to mitigate losses — the ratio rises. China’s ICOR is rising quickly.
ICOR, which I calculated here as investment — formally, gross capital formation — as a percentage of GDP divided by the real GDP growth rate, is not an officially reported figure but is derived from China’s National Bureau of Statistics data.
Through the high-growth years of 2000–2007, that figure held steady at around 3.9 – meaning that to generate 1 percentage point of GDP growth, the economy had to invest the equivalent of 3.9% of GDP.
For context, South Korea and Taiwan ran ICORs of 3.2 and 2.7 , respectively , during their own high-growth decades — suggesting China was already a somewhat less efficient converter of investment into growth even at its best.
Increasingly unproductive
Then came China’s 2008 stimulus. Between 2008 and 2019, China’s ICOR climbed from approximately 4.5 to 7.2 — almost double the pre-crisis baseline. The easy growth wins — coastal manufacturing, infrastructure connecting underdeveloped regions, a population moving from farms to factories — were largely spent.
Since 2020, China’s ICOR has continued to increase. Using official GDP figures, China’s ICOR now stands at approximately 8.5 on an annual basis, approaching 9 on a five-year rolling average.
But using more realistic GDP growth figures from the Rhodium Group, a US-based independent research provider, which estimates China’s 2025 growth in the 2.5–3% range, the implied ICOR is between 14 and 17.
The point is that even the most generous reading of Chinese economic data shows an economy that is rapidly becoming less productive with more subsidized credit.
Beijing hits its official GDP growth targets with remarkable consistency and accuracy – even to the point where high-level Chinese officials have downplayed the legitimacy of the data. It does this, in part, by treating GDP less as an output than as a target — set in advance, then achieved through credit allocation.
State-owned enterprises, local government financing vehicles, and politically connected developers borrow at rates that don’t reflect risk and invest in projects that would fail a commercial return test.
The result is that more and more investment goes into producing things that Chinese consumers don’t want to meet GDP growth targets. Unable to sell that surplus at home, Beijing exports it — selling below cost into global markets and effectively transferring the losses from its own misallocated investment onto trading partners abroad.
Implications for Trump-Xi summit
The standard framing treats the US-China trade relationship as one between a dynamic and resilient China and a US in slow decline. The ICOR data, however, complicates that picture considerably.
The US has maintained a relatively stable ICOR over the past two decades — reflecting an economy where investment and growth move in rough proportion. For China, an economy requiring more and more investment for every yuan of additional GDP is not in a position of relative strength.
It is structurally dependent on continued credit expansion and export revenues to service that credit and maintain political legitimacy. Tariffs and other US economic statecraft tools can apply pressure directly to the mechanisms Beijing uses to manage domestic stability, especially the export revenues that service an expanding debt load.
The most effective response to a structurally weakening China, however, is not for the US to wall itself off from global trade unilaterally. Rather, it is to work with allies to systematically address the dumping that Beijing’s overcapacity model produces.
The rest of the world is absorbing the same flood of underpriced Chinese exports. A coordinated multilateral framework — one that targets the subsidized overproduction at its source rather than simply redirecting it — would apply far more durable pressure than unilateral tariffs, which risk isolating the US from the very partners whose leverage it needs.
None of this means that China is about to collapse. Its system has shown remarkable capacity for managed deterioration by hiding losses, extending timelines and rolling forward problems.
But managed deterioration is different from strength, and China shows no desire to address its underlying imbalances on its own. Beijing will continue to celebrate its 5%. But the number to watch is the one they won’t mention — the rising cost of producing that growth.
Daniel Swift is a senior research analyst for economics, finance and trade for the Center on Economic and Financial Power at the Foundation for Defense of Democracies. He is a retired US diplomat.
