Chinese productivity growth has gone into reverse for the first time since the Cultural Revolution tore the country apart in the 1970s, according to a new study, highlighting the failure of recent reforms to set China on a sustainable development path.
That means that despite dramatic rises in the cost of labor, energy, credit and property, the average Chinese company has actually been getting less bang for its buck since the global financial crisis - a classic sign of the "middle income trap" that many other emerging economies such as Brazil or Malaysia have found themselves stuck in after promising starts.
"The findings strongly suggest that the over-building, the over-capacity and the 'advance' of the less efficient state into private sector markets have increasingly dragged on China's growth," wrote the report's author, Harry Wu, senior advisor at the Conference Board China Center for Economics and Business.
China's economic growth has relied increasingly on state-directed investment since the 2008/09 crisis. At the same time, the incremental approach preferred by Beijing to rationalizing state industrial giants and the financial markets they rely on has failed to bring sweeping change.
The Conference Board research paper shared with Reuters uses new methodology to analyse China's Total Factor Productivity (TFP), a broad measure of an economy's long-term dynamism that tests how much product a country is getting out of all its various factor inputs, such as labor and capital, in aggregate.
The study argues that previous estimates of China's TFP growth have overstated past performance - including exaggerating GDP growth - and that, in the period following the financial crisis, China's actual TFP growth turned negative, dropping from an average of 3.3 percent from 2001-2007 to -0.9 percent from 2007-2012.
The period marked the first time productivity had been a drag on growth since 1971-1977, a period during which China fell into chaos thanks to a power struggle within the Communist Party that pushed the country to the brink of civil war.
The Conference Board said it had seen no sign that any of the factors holding back productivity growth through 2012 have been ameliorated since.
Other studies based on official data show a slowdown, if not a reversal. Zhu Haibin, an economist with J.P. Morgan in Hong Kong, argued in a research note on Wednesday, using a different set of measures, that Chinese productivity growth had eased.
"Strikingly, the decline in potential growth appears to be driven primarily by a smaller contribution of total factor productivity, from 3.2 percentage-points in 2008 to 1.1 percent-points in 2013," he wrote.
Economists say that the advantages that propelled China's double-digit growth rates of the last decade have largely faded, and policymakers have publicly agreed.
For example, the real monthly wage of Chinese workers reached $495 (298.41 pounds) in 2011, significantly higher than their counterparts in the Philippines, Indonesia and India, according to an Accenture report.
Previous academic studies have also highlighted the tendency of Chinese firms to depend on under priced credit and fixed asset investment to grow.
The problem is that economic growth naturally lifts wages, while at the same time rates of return on fixed-asset investment naturally decline, meaning it takes more and more investment to generate the same amount of growth, even as rising costs pressure profit margins.
The critical point at which a country must abandon the easy growth boosts of investment and cheap labor in favor of pushing up productivity is commonly referred to as a "Lewis Turning Point", and only a few countries, such as South Korea and Japan, have successfully managed to pull off the transition.
Chinese average wages have risen steadily in the last five years, now standing at one fifth of average U.S. wage levels, up from 4 percent 10 years ago, according to Deutsche Bank economist Torsten Slok in New York.