China Owns Up to Recession

China must have seen a prolonged recession coming from far off. Its export business has dropped. Chinese government figures are considered unreliable, and some experts say they paint the picture the central government wants painted. The real picture is that the global economy’s decline has steepened and will get worse. China will prepare to keep its GDP growing, probably through stimulus. It also will be less likely to put money overseas where it sees rising trouble.

“Right now the global economic situation is extremely serious and in a time of uncertainty the only thing we can be certain of is that the world economic recession caused by the international crisis will last a long time,” said Wang Qishan, a Chinese vice-premier. He added that China will have to take action against the threat, which means several things.

First it means that China’s rising consumer class will not take up the slack of export declines. The number of people in this demographic segment has grown by millions per year. More and more Chinese have moved from rural areas to the huge factory cities inland in the People’s Republic. These people have seen their wages rise sharply, which has prompted sharp increases in demand for everything from residential real estate to cars. Wang seems to say that this new consumer class cannot carry the nation’s economic growth as it has for the past several years.

Layoffs and slow wage growth probably will hurt these new consumers. This will further undermine their purchasing power. And it will cause more unrest among workers who have watched factory output grow, at least until recently, and who want to be compensated for the success of the companies they work for. These workers face a problem: their costs of living have been pushed higher by their lifestyles in urban areas, as well as by inflation that has taken the cost of goods, especially food, higher.

Another effect of Chinese fear of a global recession is that China is less likely to invest in Europe. This includes any investment in sovereign debt. EU paper will carry increasingly greater risk as a recession deepens in Europe. China would rather not add that to its list of risks. It would be better to invest money in U.S. debt, which has already benefited from a flight to safety.

China plans to bolster its weakening economy. It has not said exactly how. It may create a new stimulus package like the one it instituted in 2008 at the beginning of the last deep recession. What is certain is that Chinese investment overseas will drop as it decreases its managed risk abroad.

Douglas A. McIntyre