*When the government says it isn’t.

China has no plans to hold a recession any time soon.   This economic mess is the property of irresponsible Western financial swindlers and their greedy dupes.  Fortunately, the Chinese economy has enough special characteristics to avoid a slowdown and is still in very good shape – at least according to Beijing.

NBS chief: China’s economy in good shape despite global financial turmoil
www.chinaview.cn  2008-11-02 21:26:42
BEIJING, Nov. 2 (Xinhua) — China’s economy is in good shape despite the changing economic environment, and it will maintain stable and relatively fast growth, National Bureau of Statistics (NBS) chief Ma Jiantang told Xinhua on Sunday.

Western commentators, on the other hand, believe that China’s economy is already knee-deep in trouble – whether or not it meets the classical description of a recession (2 consecutive quarters of falling consumption).  David Dayton at Silk Road International recently wrote:  

What happened in the US with homes happened in southern China with export factories.  They mortgaged their future on the promise of continued growth and now it’s all gone and debts are higher than the value of inefficient factories and increasingly inexpensive labor.

Why the different interpretation of the same set of facts?  Those of you who have been involved in China for a while know the score here.  China is politicizing an economic event by trying to control public perception and media coverage.  (This is very different from the Washington’s attempt to politicize an economic event by rewriting long-standing regulations, socializing zombie banks, and bailing out billionaires by mortgaging the future of American young people.  USA!!! )  It’s more than just a style thing - and more than just propaganda.  This is policy.  If you make the mistake of thinking it’s just a simple difference of opinion or definitions, you could be in for a rough road.

Remember – this is a nation that believes it can control the weather.   Outlawing recession is going to be a piece of cake – providing those damned Westerners don’t sabotage China’s Grand Reform with their financial disease.

Recession – Economic Cycle or Incorrect Thought?
It’s a point of nationalistic pride for the Chinese.  They are genuinely committed to the economic miracle that started way back in the Deng Xiao Ping days and continues – well, up until this moment and into the bright, glorious future.  More than a few westerners in China have been surprised when their off-hand comments about the likelihood of recession in China are treated like racist insults.  For the westerner, it’s simple science and economics.  To many Chinese, predictions of a recession are in fact, a racist insult.

Be sensitive to this
This is no laughing matter in China.  When the optimistic mood swings, it will be a sharp 180 degree turn into gloom and despair.  But we aren’t there yet.  Beijing and the rank & file Chinese are still 100% committed to the Economic Miracle, and any threat to that is a threat to China.  This is cross-cultural quicksand, and you should best avoid it completely if you can.

Be on the lookout for 5 steps on the Chinese Road to Economic Reality.

1. Denial.  That’s where we are now.  Sure, international Chinese heavyweights like Andy Xie are giving interviews talking about the dire state of the Chinese economy, but these guys don’t represent mainstream China.  Beijing is still firmly committed to a rapid development scenario, and is only qualifying their estimates by dropping their GDP growth estimates a bit.  The official line is that China will not be dragged into this thing.
    
2. Blame.  China is placing the blame for this mess at the feet of Wall Street and Washington policy-makers –which is fine.  Dead on, boys.  The only problem is that Wall Street and Washington are far away, and you and/or your investments are here in China.  That means that you will share the blame – or at least the fall-out.  It’s your problem, and fixing it is your responsibility. 
3. Foot-dragging.   Beijing is actually acting with all due speed and purpose in responding to the global crisis – but most of their efforts will be directed towards the countryside and smaller towns who are both vulnerable AND salvageable (while Shanghai and Guangzhou will have to ride this out more or less on their own).  The problem to look out for is private companies and SOEs who are slow to react to the new economic reality.  Beware of supply-chain disruptions as your suppliers go bankrupt or can’t produce due to cash shortages.  SOEs will survive, but may show you outdated prices.
4. Cooking the books.  Not corporate accounts – though that’s always a real problem.  No, we’re talking about basic statistics and macro-economic data.  Older China watchers still remember the bad old days when not only the data points were fake, but the trends were manufactured as well.  This would be a major set-back and may not happen at all.  But if Beijing starts touching-up (or making up) the basic numbers again, it’s time to rethink the whole China thing.
5. They may try to fix it.  Remember – Beijing thinks it controls nature.  They will almost certainly try to find policy solutions to an economic recession – which brings up the old-school Japan analogy.   A rushed attempt to overhaul the Chinese economy could have catastrophic consequences – but that doesn’t mean that policy-makers here won’t give it a shot.  If they get to one-up Japan in the process, so much the better.