Liaoning Shows Path to Chinese Recession, Global Depression

Bloomberg: Recession Hits China — Along With 10% Growth
The long-feared Chinese hard landing has become a reality in rustbelt Liaoning.

The northeastern province, ground zero in China’s multi-year slowdown, saw its economy contract 1 percent in the first half of 2016 as factories splutter and the coal industry groans under the weight of overcapacity.

But the hardship remains localized, with regional data for the first six months showing economic growth in 15 of the nation’s 31 provinces perked up from the first quarter. And while the golden age of across-the-board double-digit growth is history, three provinces still maintained such rates, with inland Chongqing again topping the pack.

...Together, the provincial data add to a picture of stabilization as a recovering property market and fiscal support cushion the drag from stalling old growth engines.
Basic industries are the foundation of an economy. A primitive economy is all basic industries (mostly agriculture) and as an economy develops over decades and centuries Hayek's triangle expands as new industries and intermediate goods are created. One can look at the Chinese economy as moving away from basic industries, but this is a long-term trend (and the recent evidence makes a case that rebalancing is happening very slowly, if at all). In the short-term of an economic cycle, recessions often begin in the higher stages and work their way across the triangle. China's basic industries are concentrated geographically, and this gives the appearance of a quarantined slowdown.
Liaoning's recession was papered over with cheap credit and real estate investment. In effect, Liaoning's economy "rebalanced" as the basic industries stalled and real estate investment took over. When real estate investment growth fell, GDP growth tumbled. Now that infrastructure investment has collapsed too, the economy is in the gutter.

The national figures look better, but the trend is the same, and in the case of fixed asset investment, the government is doing all the heavy lifting:
There's nothing particularly special about Liaoning beyond its reliance on basic industries. Instead of a slowdown spread out nationally, it is concentrated in a few provinces. Yet in its use of real estate and government-led fixed asset investment, Liaoning is like most provinces. The same strategy is deployed all over China, it simply wasn't enough in Liaoning because the slowdown in the "real" economy was so great and so long, now running into its 5th year.

If I am wrong, then Liaoning is a special case of a long-term concentrated slowdown. Other provinces will not see a similar economic depression and will be able to paper over their recessions with real estate and fixed investment for a few years, by which time the economy will have recovered.

If I am correct and the slowdown works through the rest of the economy, many provinces will end up in a situation similar to Liaoning because fixed asset and real estate investment was the only play in the stimulus playbook since 2008. Provinces with more diversified economies can manage for a time, but eventually they too will see the core economy weaken and investment collapse.
The slowdown in China is not only China story. The oil fields are near the start of the global economic chain (the far left of Hayek's triangle above) and the oil exporters are in crisis. Materials exporters such as Brazil too. Australia looks suspiciously like China with a housing market making up for a decline in basic industries. China's manufacturing weakened and industrial production is weak in the United States as well:
In the United States, the focus is on wages, employment and consumer spending. Yet Hayek's Triangle shows consumer industries are typically the last sectors to be hit, as consumption is the final stage of production. There is mounting evidence of recession potential in the United States, but it too will not be obvious until after it has worked its way through the higher stages of the economy.

The best hope for the global economy is the recent run-up in commodity prices. Similar to recessions, recoveries are also not immediately obvious. (Emerging markets and commodities bottomed around December 2008, three months before the developed economies.) The downturn in oil over the past couple of weeks is a worrisome development on that score.

Related: Liaoning GDP Expected to Contract for Third Consecutive Quarter, No Recovery In Sight

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