What Does A Chinese Recession Look Like?

A recession in the U.S. is present when GDP turns negative. That may not be the case in China. The People’s Republic needs much more rapid growth to support its factory activity, infrastructure expansion, and the consumer spending of its huge and growing middle class.

China’s GDP grew by 9.5% in the last quarter, a slight slowing from the previous one in which economic activity was higher by 9.7%. The government also announced that industrial production rose an unexpectedly strong 15.1%. That, inflation, and rapid loan growth have caused concern within the central government that inflation has begun to rise too quickly. Critical consumer costs like those of food are higher by double digits.

The migration of people from rural to industrial regions and the need to pay these workers higher and higher wages depend on rapid growth in China’s GDP. Ironically, it’s the consumer expenditures of this growing middle class that help fuel this GDP growth, along with export activity, which must continue to be robust. Any breakdown in this cycle would cause the People’s Republic severe problems. A slowdown of purchasing activity in the West and in Japan would undermine exports, which in turn would undermine factory employment, and which would end up undermining expenditures by China’s own population.

Inflation may trigger the vicious cycle and is probably more likely to do so than any other factor. Demand for finished goods in the U.S., UK, EU and Japan has already been challenged by low GDP growth, higher taxes in some nations, and the Japan earthquake. The Japan catastrophe may raise economic activity in the world’s third largest nation by GDP as it rebuilds, but that will probably only last a quarter or two. Japan will likely revert to its slow growth rate afterwards.

There are no reasons to believe that inflation will slow much in China. Tight money policies have not shut down lending, and real estate demand continues to rise. Much of China’s inflation is “imported” with agricultural products and crude. China has become the largest net importer of oil. The global price per barrel may have dropped below $100, but it is not likely to drop sharply enough to spare China’s economy from the shock of high energy costs.

There is no way to gauge what a recession in China would look like. It would certainly be triggered well before its GDP growth reaches negative levels. The support of current consumer activity and manufacturing might cause distress if GDP growth dropped below 7% or perhaps not even that much. China’s GDP expansion has been so high for so many years that there are no yardsticks that apply.

Douglas A. McIntyre