Huge Negative Wealth Effect In China

China might be in a recession or going into one. That’s a controversial statement since real GDP rose 5.2% y/y during Q4-2023, according to the official data from the National Bureau of Statistics of China (NBS). The NBS also reported that industrial production rose 6.8% y/y in December and that inflation-adjusted retail sales increased 7.7% last month (chart). Those are not recession readings.

China’s recession is hiding in plain sight. It is the result of a major negative wealth effect on consumers caused by plunging real estate and stock prices. It’s hard to get accurate data on the former because the property market has turned very illiquid over the past couple of years as property developers have faced severe liquidity and solvency challenges. In an illiquid market, one can only guess the correct value of an asset.