The statistical problems of separating the contribution to growth of capital accumulation from the contribution of growth in total factor productivity are so large that we should be cautious about drawing strong conclusions in the best of circumstances. But in any case, growth results from the combination of high levels of capital accumulation and moderate total-factor productivity growth, and does not suddenly run into a structural brick wall because of the supposedly diminishing marginal returns to investment. This could be an issue if China's economy were integrated across its regions, and if China and the southeast Asian economies were growing from similar levels in step with each other, and at similar levels of development and comparative advantage. China's competition might also be a factor if its growth were irrelevant to the expansion of other economies that are important economic partners of Southeast Asia. There are reasons for doubt on every point.
China is a highly fractured and regionally diverse economy.
Its eastern and southeastern coastal provinces, from Guangzhou to around Shanghai, with a population of almost one-quarter billion, have grown rapidly through deepening integration into the international economy for almost two decades. Structural change in these coastal provinces is opening opportunities for specialization in line with comparative advantages in the poorer inland provinces of China and in the lower-income range of industrializing economies in Southeast and South Asia, much as structural change earlier in Japan, Hong Kong, Taiwan, and Korea opened the way for coastal China. Even in the coastal provinces that have been growing with unprecedented strength, the availability of capital per worker and the capacity to utilize more productive technology fall well short of Thailand and even shorter of Malaysia. This could change over time, but by then, as long as macroeconomic and financial sector management supports a return to growth, the graduation into more sophisticated and diverse exports will elevate Thailand and Malaysia beyond vulnerability to direct competition from a single competitor. Also relevant is the contribution that sustained, strong growth and structural change in mainland China have made to the growth prospects elsewhere in East Asia, most notably in the economies of Hong Kong, Taiwan, and Korea.