Growth of China's total factor productivity, a major measure of economic productive efficiency, slowed from more than 4 percent between 1980 and 2009 to 1.8 percent in the 2010-2019 period. However, there are still many structural factors that can drive a V-shaped rebound in TFP growth.

Our calculations show that future growth of the Chinese economy depends on whether TFP growth can be kept at 2.5 percent or even higher.

Unlike industrialized countries like the United States that face a lack of large-scale investment opportunities and relatively insufficient investment — which have combined to constrain productivity growth — China still provides abundant potential investment opportunities.

China's development remains uneven and unbalanced. For instance, it is still at the midrange to low end of the global value chain. It faces challenges in satisfying people's desire for better lives. The development disparities between urban and rural areas and among regions persist. These structural issues need to be addressed to provide further space for productivity growth.

China still has ample room to improve resource allocation efficiency, an important source of TFP growth.

Over the past 20 years, the average return on investment capital for listed companies has been only 3 to 4 percent, far lower than the average of 10 percent for listed companies in the US over the past century.

China's financial sector has seen its contribution to GDP surpass that in major Western industrialized countries, yet the costs of financial intermediation remain high, and high financing costs have yet to be resolved.

Through top-level design and industrial policies, maintaining investment intensity and even arranging in-advance investments in key areas to guide resource allocation toward sectors with greater social returns will help form new driving forces for productivity growth, and address long-standing structural issues in high-quality economic and social development. Once government investment and policy incentives play a guiding role during this process, it will effectively promote private investment, boost innovation, stimulate market vitality and leverage the decisive role of the market in resource allocation. Thus China's productivity growth challenges may be resolved, and the potential for long-term economic growth can be unleashed in a smooth fashion.

Sector investment key

Facing mounting downward pressure, it becomes even more necessary to increase investment intensity in critical sectors and industries. Such investments can support China's economic transformation and contribute to an increase in TFP growth, thus making some forward-looking investments advisable.

To maintain long-term economic growth, investment intensity must be sustained. Sectors such as expressways, high-speed railways, automobiles and real estate may even require in-advance investments.

With the widespread and growing use of clean energy and further development of digital technologies such as artificial intelligence and big data, human civilization could enter a new phase. In this process, new industries will emerge, fresh ideas will surface, and nearly all existing industries can undergo carbon neutrality and digitalization processes.

For example, carbon neutrality is not only a technological issue, but also an economic and management matter. Achieving China's dual-carbon goals requires an estimated investment of nearly 300 trillion yuan ($41.2 trillion) before 2050. If this investment is evenly distributed over the next 30 years, it means China's annual investment in carbon neutrality will be about 8 percent of GDP. Such investments will become one of the main driving forces for China's economic transformation. Investment and innovation surrounding key sectors, technological changes, industrial policies and innovative business models will determine China's path to achieving carbon neutrality.

5G and 6G, as core components of China's industrialization infrastructure, represent essential areas for investment. In the baseline scenario, the introduction of 5G into various industries will contribute about 31.21 trillion yuan to GDP.The value brought by 5G will be concentrated mainly between 2026 and 2030, and by then China will enter the era of 6G.

Manufacturing still leads

The share of China's manufacturing output in GDP is higher than that of major developed countries and the global average.

As economic development progresses, the share of manufacturing output in GDP generally declines due to changes in demand structure. However, it's necessary for China to maintain a certain share of manufacturing output in GDP, such as 23 percent, as a strategic goal for economic and social development.

On the one hand, China still needs to accelerate industrial upgrading and quality optimization, consolidating its competitiveness and advantages in manufacturing. On the other hand, achieving high-quality development requires maintaining a high growth rate of TFP. Manufacturing — especially high-end manufacturing, equipment manufacturing and intelligent manufacturing — plays a significant role in this endeavor.

According to World Bank data (2019), the proportion of midrange to high-end manufacturing in the sector is 41.5 percent in China, 47.1 percent in the US, 56.6 percent in Japan and 60.7 percent in Germany. By the time China basically realizes socialist modernization by 2035, can we significantly increase the proportion from the current 41.5 percent to 55 percent?

Moving up value chain

We need to increase investment in innovation, not only by increasing the share of spending on R&D in GDP, but also by optimizing the structure of R&D and significantly increasing the share of basic research in overall R&D expenditure. Our analysis shows that over the past 30 years, there has been a correlation of over 90 percent between China's R&D intensity and TFP.

China's R&D expenditure ratio to GDP had rapidly grown from less than 0.6 percent in 1995 to 2.4 percent in 2020, reaching the average level of industrialized countries. In 2022, China's R&D expenditure surpassed 3 trillion yuan for the first time, and R&D intensity reached a historic high of 2.55 percent. However, it still lags behind the levels in the US (3.45 percent), Japan (3.26 percent) and Germany (3.14 percent) over the same period.

Since major country competition ultimately revolves around technological innovation, would it be possible for China to raise its R&D spending ratio to over 3 percent?

The structure of R&D deserves more attention. In 2021, China's ratio of R&D expenditure focused on basic research to total R&D spending was only 6.5 percent. By comparison, developed regions and countries like Europe and the US maintain a ratio of 12 percent or higher, with the US at around 15 percent, according to 2019 data.

The 14th Five-Year Plan (2021-25) has set the goal of increasing the proportion of basic research spending in overall R&D expenditure to over 8 percent by 2025. If we can further increase the basic research spending ratio — such as 12 percent or even 15 percent — it will strongly promote China's high-level scientific and technological self-reliance, enhance the country's position in the global value chain, and create favorable conditions for sustained TFP growth in the new development stage.

Boost research spending

Increasing spending on basic research requires stronger support for basic research centers at universities and research institutions, with long-term public funding being particularly crucial. China has the conditions and policy space for large-scale issuance of government bonds. It is advisable to issue long-term special treasury bonds, and the funds obtained can be directly used to support basic research centers and increase the proportion of basic research in overall R&D expenditure.

To increase investment in basic research, related market forces also need to be fully mobilized.

The government can provide incentives for market entities such as tax incentives and a more efficient patent system. More importantly, we need to reshape the valuation system of the capital market, incorporate enterprise investments in basic research and reflect them in market valuations through premiums.

The writer is dean of the Guanghua School of Management at Peking University.