China's economic resilience is often measured by its GDP growth rate, but there's a more telling indicator: the Incremental Capital Output Ratio (ICOR). This metric reveals how much additional investment is needed to produce one additional unit of economic output. A healthy economy maintains a low ICOR, but China's ICOR has been rising, indicating a less productive and more subsidized credit economy. This is particularly concerning given Beijing's consistent and accurate GDP growth targets, achieved through credit allocation and state-owned enterprises borrowing at non-risk-reflective rates. The US-China trade relationship is often framed as a dynamic China vs. a declining US, but the ICOR data complicates this narrative. The US has maintained a stable ICOR, while China's ICOR is rising, indicating structural dependence on credit expansion and export revenues. The most effective response to a structurally weakening China is not unilateral trade barriers but a coordinated effort with allies to address Beijing's dumping of underpriced exports. While China's system has shown resilience in managing deterioration, the rising cost of producing growth is a critical number to watch. Daniel Swift, a senior research analyst and retired US diplomat, emphasizes the importance of considering these metrics for a comprehensive understanding of China's economic strength.
