Even as global markets are starting to recover from the recent slump in the financial markets, Chinese shares are still underperforming. Shanghai shared ended the week with a drop of almost 8% after volatile trading that started last Monday, spreading fear to global markets. Other stock markets in Asia continued their rebound, helped by a strong finish for US shares.

China is slowly but surely sliding into recession and it is a widely held belief that the governing bodies will not be able to respond in time to deflect this oncoming event. Citigroup Inc.’s top economist Willem Buiter said that the government will not be able to avoid this major slowdown just by implementing large-scale fiscal policies to stimulate demand.

According to Buiter, the only possible way out of this situation is to fund a consumption-oriented fiscal stimulus program which will have to be monetized by the People’s Bank of China.

“Despite the economy crying out for it, the Chinese leadership is not ready for this,” Buiter, chief economist at Citigroup, quoted in a media call hosted on Thursday by the Council on Foreign Relations in New York. “It’s an economy that’s sliding into recession.”

Some economists and investors have long questioned the accuracy of China’s official growth data released by the government. When the current Premier Li Keqiang was the party secretary of Liaoning province in 2007, he said that figures for GDP were “man-made” and therefore unreliable, according to a diplomatic cable published by WikiLeaks in 2010.

In fact, a survey conducted by Bloomberg earlier this month reveals that the median estimate of 11 economists puts China’s first-half GDp growth rate at 6.3%, compared with the official figure of 7%.

There is practically universal agreement outside official Chinese reporting that the economy has not been growing at anything near the official rate of 7%, which is a very high number for most countries, in the last two quarters. China does not revise its GDP growth number after each and every quarter and has always been matching or exceeding its decreed target.

Premier Li is currently eager to defend and maintain a 7% economic growth goal at the current time when the concern over the slowing demand in China is one of the driving forces fueling volatility in global markets.

According to Buiter, the true rate of expansion “is probably something closer to 4.5% or less. They will respond but they will respond too late to avoid a recession, which is likely to drag the global economy with it down to a global growth rate below 2% – which is in my definition a global recession.”

 

Can a China Recession Be Stopped?

There are also questionable events that occurred throughout the which that really puts the capabilities of Beijing to manage the economy into question.

Buiter said that the world is really questioning “the competence of the Chinese authorities as managers of the macro economy.” after the boom and bust in the Shanghai Composite Index, which more than doubled in less than a year before a selloff erased US$5 trillion in market value in two months.

On a more optimistic note, the banking giant Goldman Sachs recently sent a note to its clients to reassure them that the economy is not headed for a global recession. Analyst Peter Oppenheimer and his team asserted that the perception can be more important than the reality, saying that the biggest threat to global growth could be the fear of a Chinese slowdown, whether or not such a phenomenon would actually affect global economic growth.

The more scared the investors are, the less likely they are to take risks, which could freeze stock markets and company activity. But, according to Goldman, China’s problems are limited to just China and won’t be causing a global slowdown.

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