China Economy: Recession in Second Quarter?

The evidence of a slowing economy is everywhere, based on nearly all the data issued recently. As Reuter’s editors point out:

Risks are rising that China’s economic growth will slide further in the second quarter after weekend data showed unexpected weakness in May trade and domestic activity struggling to pick up.

Evidence has mounted in recent weeks that China’s economic growth is fast losing momentum but Premier Li Keqiang tried to strike a reassuring note, saying the economy was generally stable and that growth was within a “relatively high and reasonable range”.

China’s economy grew at its slowest pace for 13 years in 2012 and so far this year economic data has surprised on the downside, bringing warnings from some analysts that the country could miss its growth target of 7.5 percent for this year.

“Growth remains unconvincing and the momentum seems to have lost pace in May,” Louis Kuijs, an economist at RBS, said in a note. “The short-term growth outlook remains subject to risks and we may well end up revising down our growth forecast for 2013 further.”

Compounding these problems are two factors. The first is that many experts believe China’s local and national government falsely report numbers that are too high in an effort to show the world that the miracle of the People’s Republic is partially made of white hot growth due to policy. So China may be worse off than its government reports.

The second factor is that a deceleration of the creation of China’s huge middle class and the wages paid to them. Problems with these systems could substantially undermine future GDP improvement. China almost certainly has to move to the U.S. model of economic improvement, which is driven predominantly by consumer spending. China’s manufacturing sector cannot drive employment and real wage increases if it is in trouble by itself.