Chinese Recession: Real or Not?

on May 25, 2012 at 3:15 PM

Probably the best indication that the Chinese economy has entered a meaningful recession is the Chinese central government’s urgency to reassure everyone it isn’t so.

There have been rumblings since the end of last year that the Chinese economy was slowing, with poor lending practices, a property bubble and poorly managed internal migration all part of the new scenario sketched out for a possible recession. If it wasn’t for Europe’s unceasing convulsions over the credibility of its currency union the outlook for Chinese growth would be the central question for global economic trend-watchers.

That’s because the Chinese economy is more than just an enormous and growing player in world markets; its success is a fundamental philosophical challenge to three decades of smaller-government mantras and free market absolutism. The success of state-led and expressly state-supported Chinese companies at a time of US economic weakness have cast a shadow over the triumphalism of what observers often insist on labeling “western” or US-style business practices.

It is probably arguable how truly “free market” much of the US or “Western” economic policy has ever been, particularly when it comes to expensive energy infrastructure that often demands social consensus over land and resource.

Freedom of Sight

Increasingly, the real advantage for the West, and the weakness of the Chinese approach, seems to lie less with free market or government-led investment, but with a longer-term commitment to transparency of data and transparency of process.

The system for building energy and guaranteeing access to energy in the US is messy and cumbersome, but it also has historically relied on open access to data about usage, pricing and regulatory direction. The legal system in “Western” countries can be a complete headache and a huge expense, but it generally creates disincentives to simply make up information.

That hasn’t been the case in China. One of the real challenges of the past six months has been the incapacity of economists to build reliable models for forecasting Chinese growth because they have so little access to real data about historic prices and performance. The outlook for China is largely a matter of opinion and massed anecdote masquerading as fact.

The lack of access to hard data in the Chinese economy underlines the comparative value of data collection efforts in the US and the developed world as efforts to rebuild energy infrastructure and guarantee reliable access are dialed up. The work of groups like the Department of Energy’s Energy Information Administration – marking the appointment of a new chief in Adam Sieminski today – and the newly aggressive International Energy Agency is shown to be starkly important to the sector, and the long-term health of the economy at large.

For a video of Sieminski discussing the necessary conditions for vibrant energy markets, watch here.

The fatal flaw of tightened information control and the resulting temptations to manipulate information is not a uniquely Chinese problem by any means. It characterizes many large, centralized administrations so long-accustomed to success and power that they cease to question their approach – whether they lead the Chinese Communist Party or massive Wall Street banks.

An Eye to the Future

With budget cuts still looming in Washington and across the OECD, it is essential to remember the role that reliable data and transparency play in sustainable economic development.

On a day when a private US company – SpaceX – led by a South African-born CEO is docking at the International Space Station, it is worthwhile to point out that we are also in a period of technology changes likely to make panic in China’s property sector or the European currency a footnote in future history texts. Regardless of technology’s advance, one thing that is unlikely to change is the need for robust, transparent data in driving wise, innovative and constructive business decisions.