China’s extraordinary productivity growth in manufacturing since industrial restructuring intensified in the mid-1990s has been an important driver of the country’s growing international competitiveness and corporate profitability – much more so than low wages or an undervalued exchange rate.

In a recent article for China Economic Quarterly, Pieter Bottelier and Gail Fosler of The Conference Board argue that China’s spectacular economic growth is driven by a self-sustaining “flywheel” of rapid productivity gains, increased profitability and rising investment in manufacturing. Because these factors are mutually reinforcing, China’s economic flywheel is unlikely to slow any time soon. As a result, the internal and external imbalances generated by this growth model are likely to grow worse before they get better.