China is in a recession, not a depression

In terms of narratives, why is there only a choice between collapse and smooth sailing?

Chinese statistics claim 5.2% GDP growth in 2023. Is this true? Or is it misleading, for example because the comparison was with 2022, when numbers were skewed to the downside due to all the lockdowns?

The truth is that these are just number games. The reality on the ground is that China has all the symptoms of a recession.

As a measurement of meaningful economic activity, nominal GDP is indeed of questionable value. As discussed in previous articles, productive GDP measured at purchasing power parity is a much more useful measurement. Unlike GDP, it clearly reflects China’s enormous dominance of world production. But that is beside the point. The point is that the Chinese economy, its primary stock markets (Shanghai + Hong Kong), as well as business confidence in general are in the dumps. Tax revenues have dropped so precipitously that drastic pay cuts have been imposed on government employees in many provinces, according to some reports as high as 40%. Some state employees were even asked to return bonuses paid on in previous years.

The fact that the Chinese government has banned talking about it doesn’t change that. How technically this or that authority defines a recession (经济衰退) is frankly also irrelevant. Ask 100 Chinese business owners and you will get a clear answer.

As Marco Castelli put it on Twitter: “Economy is tough, business down.”

https://x.com/macastel3/status/1746331351937364407

Marco Castelli reporting on somewhat glum views from the countryside

As we have written elsewhere, these difficulties have clear-cut reasons which go beyond the mere piercing of a real estate bubble. In particular, we would argue that interventionist policies are a major factor.

To wit: Will the real China please step forward?

China via social media

Yet at the same time, China is not in a depression (经济萧条). It’s not collapsing. Despite some renewed dabbling in central planning on the part of the government, China remains a free market-driven economy with essentially no welfare, a high level of respect for property rights and some of the fiercest competition in the world. This generates its own momentum, and regardless of how much the government interferes and attempts to interfere, the collective energy of 1.4 billion people and millions of privately owned companies is the ultimate decisive factor.

Recessions also bring new opportunities. For example, in many industries it becomes easier and cheaper to find capable staff. In addition, more businesses than usual close their doors, and as a result, commercial rents tend to fall, a phenomenon which we are seeing in many Chinese cities. This gives the survivors the opportunity to expand, and newcomers the opportunity to establish themselves cheaply.

Furthermore, not all sectors are ailing. Some industries are in fact booming, such as e-commerce, logistics and “new energy” related industries. But those are merely the most prominent ones. Wave after wave of innovative consumer goods flood the market, stimulating consumption and replacing older technologies. Moreover – and this is perhaps the most important point – China’s vast industrial base continues to supply the world with most of its consumer goods and machinery. Since no other country in the world comes even close to replicating China’s supply chain and pool of skilled labor, that is not about to change anytime in the near future.

Interventionist policies impact economic efficiency, slow down structural adjustment and hamper economic development. But unless market mechanisms are completely suspended – something which is an impossibility – problematic policy decisions and interventionism lead not to collapse, but rather to lower growth rates and sluggish recoveries. This is exactly what we are seeing.