China's Economic Slowdown: A Firm-Level Perspective

Abstract:

This paper develops a new representative firm-level dataset for Chinese manufacturing from 1998 to 2019 by combining tax, registry, and inspection records and correcting for sampling biases in existing administrative data. Using a CES production framework with firm-specific distortions, the paper distinguishes labor-augmenting from Hicks-neutral productivity growth and introduces a novel decomposition of aggregate TFP growth into efficient growth and changes in misallocation. The analysis documents a sharp slowdown in Chinese manufacturing productivity growth after 2007, driven both by weaker incumbent-firm productivity growth and by a diminished contribution from firm turnover and reallocation. Before 2007, rapid productivity growth reflected declining misallocation over firms’ life cycles, especially among young firms. After 2011, however, distortions affecting new firms dissipated much more slowly, leading to persistent misallocation and substantially lower aggregate TFP growth.