The Missing Perspective of The WSJ Article: “China’s Sprint for Tech Dominance Can’t Hide an Economy Full of Holes”

We examined the Wall Street Journal (WSJ) article: “China’s Sprint for Tech Dominance Can’t Hide an Economy Full of Holes,” Dec. 22, 2025, which asserts that “Self-sufficiency push has made China a tougher competitor to the U.S., but it comes with enormous waste.” For analysis, we summarized the article, added insights from other authors, and then split into two teams. One team proposed an objection, and the other a counterargument.

After our analysis, we suggest that the WSJ article examines China through a traditional Western market-economy perspective that emphasizes capital efficiency, return on investment (ROI), and consumption. This approach may understate or frame as “failures” what the Chinese government considers necessary strategic costs to achieve long-term geopolitical objectives.

Introduction: The WSJ Article

Over the past two decades, the People’s Republic of China has emerged as a central actor in global manufacturing and trade. Its export volumes, especially in technologically sophisticated sectors such as electric vehicles, solar panels, and industrial robotics, suggest an economy characterized by rapid productivity gains and rising efficiency (Lardy 2019). Yet a growing body of evidence points to a more complex and troubling reality beneath these headline indicators (Naughton 2021; Prasad 2024). This article examines what can be termed China’s “productivity paradox”: an apparent contradiction between record output and declining efficiency, driven by debt-fueled investment, capital misallocation, and structural imbalances in the country’s growth model.

China’s Productivity Paradox: Record Output, Declining Efficiency

China’s factories are setting new records across a range of industries. From electric vehicles and solar technologies to advanced robotics, the country has consolidated its position as a global manufacturing hub and is running a trade surplus of approximately $1 trillion (World Bank 2024). On the surface, such performance appears to validate the effectiveness of state-led industrial policy.

However, productivity is not measured solely by output. In economic terms, productivity is typically defined as the ratio of output to input—capital, labor, energy, and technology:

Productivity = Output ÷ Input

By this standard, China’s performance appears far less robust. The state has relied on extensive subsidies, cheap credit, and administrative support to sustain growth in favored sectors (IMF 2023). The volume of inputs required to generate each additional unit of output has risen, implying a deterioration in overall efficiency. Growth is increasingly driven by debt expansion rather than by improvements in innovation or resource allocation.

The paradox, therefore, is that while China’s manufacturing and export indicators appear strong, the underlying efficiency and sustainability of this growth model are weakening.

High Volume, Low Efficiency

At first glance, China’s manufacturing surge suggests a successful industrial upgrading strategy. The country has achieved scale and sophistication in high-profile sectors, notably electric vehicles, solar panels, batteries, and industrial robotics (OECD 2022). Factory-level adoption of automation and advanced processes has, in numerous instances, increased local efficiency.

Yet economy-wide productivity depends not only on localized gains but also on whether resources are deployed to their most productive uses. In China, the rapid expansion of firms in similar technological niches—such as the proliferation of more than 150 humanoid robot manufacturers, often reported in industry surveys (Caixin 2023)—usually results in overlapping capacity, thin profit margins, and dependence on state-backed financing.

In this context, high volume does not equate to high efficiency. Many enterprises achieve scale by relying on inexpensive credit and subsidies rather than by generating sustainable profits (Huang 2016). While output statistics rise, the capital and policy support required to sustain this activity grow even faster, thereby reducing aggregate productivity.

Waste, Misallocation, and the Cost to Growth

The key issue is not simply the magnitude of investment, but its quality. A significant share of China's capital is directed toward sectors and firms that do not generate adequate returns. Numerous enterprises fall into the category of so-called “zombie companies”: entities that cannot meet their financial obligations from operating revenues and instead persist through repeated loan rollovers or state interventions (Caballero, Hoshi, and Kashyap 2008; IMF 2020).

High-profile examples include certain electric vehicle manufacturers, such as NIO, which has accumulated losses exceeding $10 billion according to corporate filings and analyst reports (NIO Annual Report 2023). While such firms may advance particular technologies, their sustained reliance on external support imposes broader economic costs. According to estimates from the International Monetary Fund, misallocation of capital of this kind has reduced China’s gross domestic product by approximately 2 percentage points relative to its potential (IMF 2023).

This misallocation represents forgone opportunities. Resources that could have supported more productive small and medium-sized enterprises, higher-value services, or an expanded social safety net are instead absorbed by low-return or loss-making industrial projects (Pettis 2013). The result is a pattern of growth that appears substantial in aggregate but is increasingly inefficient at the margin.

Debt-Driven Expansion and the Rise of Zombie Firms

The underlying engine of this pattern is an unprecedented expansion of debt. Over the past decade, China’s total debt—combining government, corporate, and household liabilities—has surged to roughly $23 trillion, depending on the measure and source, vastly exceeding the scale of its annual export surplus (BIS 2023; IMF 2023).

This credit expansion has financed large-scale investments in manufacturing capacity, infrastructure, and real estate. However, much of this capacity does not generate sufficient cash flow to service its obligations. Instead, loans are regularly extended, restructured, or rolled over to avoid formal default, contributing to a growing population of zombie firms and financially strained local governments (Rogoff and Yang 2020).

From a narrow financial-stability perspective, some analysts argue that this situation is manageable because the bulk of the debt is domestically held. This view underpins the first common objection to the productivity paradox thesis.

Arguments and Counterarguments

Objection 1: How Can Productivity Decline Amid Booming Exports?

The argument: It appears contradictory to claim that productivity is falling when export volumes are at record highs, and factories are adopting robots and automation. If plants are producing more with fewer workers, does this not indicate rising productivity?

Clarification: This view conflates local efficiency with economy-wide productivity.

Individual factories may indeed become more efficient in their immediate operations—for example, by producing more units per worker or per machine hour. However, if these factories:

Sell goods at extremely low margins or at a loss,

Rely heavily on subsidized inputs and low-cost credit, and

Continue operating only because of repeated state-backed loans,

then the overall productivity of the economy can still fall (Hsieh and Klenow 2009). The system, in effect, expends increasing amounts of capital, energy, and administrative effort to generate each additional unit of GDP.

Thus, robust export performance can coexist with declining productivity if the cost of achieving that performance rises even more rapidly than the value produced. Current evidence suggests that this is precisely the situation China faces (IMF 2023; Naughton 2021).

Objection 2: If the Debt Is Internal, Is It Really Dangerous?

The argument: If approximately 95 percent of the loans underpinning China’s investment boom are owed domestically—primarily to state banks and local savers—then the risk of a classic external debt crisis appears limited. Without large foreign creditors, the argument goes, the country is shielded from sudden stops in external financing.

Clarification: While it is correct that about 95 percent of China’s debt is internal (IMF 2023), this does not eliminate risk; it transforms it.

Rather than a sudden external crisis, domestic over‑indebtedness can produce a “silent crisis” within the financial system. Banks burdened with non-performing or weakly performing loans become increasingly risk-averse and less inclined to finance new, innovative, and productive projects. Capital becomes trapped in supporting legacy borrowers, particularly zombie firms and indebted local governments (Song, Storesletten, and Zilibotti 2011).

The consequence is a gradual erosion of dynamism: fewer resources flow to emerging sectors or entrepreneurial ventures, and more are devoted to sustaining inefficient incumbents. This dynamic suppresses productivity growth and reinforces the broader structural problems in the economy.

Objection 3: Can Export Earnings Simply Cover the Losses?

The argument: Given the scale of China’s export revenues, some contend that the state could simply reallocate a portion of this income to recapitalize banks, absorb bad debts, or support struggling firms. From this perspective, financial losses appear manageable relative to the size of the external surplus.

Clarification: This argument overlooks both the scale mismatch and the associated opportunity costs.

Scale mismatch: China’s export surplus is on the order of $1 trillion, whereas total debt stands around $23 trillion (BIS 2023; World Bank 2024). Even a full allocation of the surplus to debt remediation would make only a modest impact on the overall stock of liabilities.

Opportunity cost: Every unit of fiscal or quasi-fiscal capacity used to repair bank balance sheets or bail out unprofitable industries is a unit not invested in the social safety net. China continues to underinvest in critical public goods, including rural healthcare, education, and pension systems (OECD 2021). As a result, households maintain high savings rates as a form of self‑insurance against future shocks (Chamon and Prasad 2010).

This behavior suppresses domestic consumption, which remains too weak to act as a strong engine of growth. Redirecting more resources to industrial and financial bailouts, rather than to households, deepens the very imbalance between external and internal demand that the government aims to fix.

Objection 4: Why Not Resolve the Problem by Printing Money?

The argument: Because most of China’s debt is internally held, some argue that the state could rely on monetary expansion to gradually erode the real value of liabilities. In this view, concerns about currency devaluation are less salient because the country is less dependent on foreign borrowing and focuses heavily on exports.

Clarification: Large-scale monetary financing of debt would entail substantial risks in at least three areas:

Capital Flight and the Confidence Trap

Monetizing debt dilutes the real value of domestic savings. Historical experience, particularly the 2015–2016 episode of capital outflows following modest currency devaluations, demonstrates that Chinese households and firms respond acutely to perceived threats to the value of their assets (Setser 2017). Fears of devaluation or financial instability can prompt large-scale capital flight, straining the banking system and forcing the authorities to adopt restrictive capital controls.

Imported Inflation

China is a major importer of oil, food, and other essential commodities. A significant depreciation of the currency would raise the domestic price of these imports, driving up the cost of living and eroding real household incomes (UNCTAD 2022). It would also increase input costs for manufacturers, particularly in energy- and resource-intensive sectors, further undermining profitability.

Trade Conflict and Protectionism

A deliberate and sustained currency devaluation would likely be interpreted by trading partners as an attempt to secure an unfair competitive advantage. This would provide political justification for tariffs and other trade barriers targeting Chinese exports (Bown 2020). Given China’s heavy reliance on external markets, such measures would threaten the very model of export-led growth that monetary expansion is intended to support.

In sum, while monetary expansion may appear to offer a straightforward means of addressing internal debt burdens, it carries significant risks to financial stability, domestic welfare, and international trade relations.

Structural Imbalance at the Heart of China’s Model

Taken together, these dynamics point to a more profound structural imbalance in China’s development model rather than a temporary cyclical problem. The core features of this model can be summarized as follows:

The state directs substantial resources—through subsidies, credit, and administrative support—toward manufacturing and strategic industries (Naughton 2021).

This strategy produces impressive output and export figures but also generates rising levels of debt, capital misallocation, and an increasing number of zombie firms (IMF 2023).

Simultaneously, underinvestment in the social safety net suppresses household consumption, compelling families to save heavily and limiting domestic demand as a driver of growth (Chamon and Prasad 2010).

The picture presented by WSJ highlights the productivity paradox: China seems strong in industrial output and global trade, but the efficiency and resilience of its growth are declining.

The Missing Perspective

Does the WSJ article reflect the “Western vision” of economics and contrast with potential Chinese long-term strategies?

1. Efficiency vs. Security (The “Waste” Argument)

Western Perspective (Article): The article frames state subsidies as “waste” and “misallocation” because they lead to money-losing companies and redundant industries (e.g., 150 humanoid-robot companies). It cites the IMF to argue that this state aid has reduced GDP by 2% due to inefficiency.

Potential Chinese Strategy: From Beijing's perspective, this “waste” might be viewed as a security premium. The article acknowledges that China’s strategy is to “boost self-sufficiency… as insurance against adversaries”. In this view, redundancy isn't a bug; it's a feature. Having 150 robot companies ensures that even if 140 fail, a robust domestic supply chain survives sanctions or trade wars. The goal is resilience, not just financial efficiency.

2. Profitability vs. Market Dominance

Western Perspective (Article): The article cites EV maker NIO's $10 billion loss as evidence of a “money pit” and a troubled economic model. It implies that if a company isn't financially viable, it is a drag on the economy.

Potential Chinese Strategy: The “hidden” strategy here is often market cornering. By subsidizing losses for years, Chinese companies can undercut global competitors, drive them out of business, and capture the entire global supply chain (as happened with solar panels). The article calls this “exporting its way out of trouble”, but for China, it may be a deliberate play to secure long-term industrial dominance, where current financial losses are just an investment in future monopoly power.

3. Consumption vs. Production (The “Growth” Argument)

Western Perspective (Article): The article criticizes China’s “weak consumption” and cites the IMF urging a shift toward a consumer-led model (“It's patriotic to spend money”). Western macroeconomics generally views consumer spending as the healthiest engine for sustainable growth.

Potential Chinese Strategy: The Chinese state has historically prioritized production power over consumer power. By suppressing domestic consumption (through low wages and high savings rates mentioned in the text), the state directs resources into infrastructure and high-tech R&D instead. The strategy might be to build an economy that makes the world's essential goods (control of supply) rather than one that just buys them.

4. Short-term Debt vs. Long-term Assets

Western Perspective (Article): The text highlights the alarming $23 trillion debt and the fact that “factory robots… churn out products jobless college graduates cannot afford”. This is a classic signal of economic overheating and imbalance in Western models.

Potential Chinese Strategy: The Chinese government may view this debt as internal accounting (the “left pocket owing the right pocket”) rather than a solvency crisis. The “hidden strategy” relies on the belief that these massive investments in robots, space stations, and AI will eventually yield technological superiority that outweighs the financial debt.

Conclusion: 

The article evaluates China using metrics that define success in a liberal democracy: consumer welfare, short-term efficiency, and private sector profitability. While these metrics correctly identify financial risks, they may “lose sight” of the fact that China is playing a different game—one where economic inefficiency is an acceptable price for technological sovereignty and geopolitical leverage.

References

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Note:

A group of friends from “Organizational DNA Labs,” a private network of current and former team members from equity firms, entrepreneurs, Disney Research, and universities like NYU, Cornell, MIT, Eastern University, and UPR, gather to share articles and studies based on their experiences, insights, inferences and deductions, often using AI platforms to assist with research and communication flow. While we rely on high-quality sources to shape our views, this conclusion reflects our personal perspectives, not those of our employers or affiliated organizations. It is based on our current understanding, informed by ongoing research and a review of relevant literature. We welcome your insights as we continue to explore this evolving field.