It seems to be yet another cycle of China taking a temporary downturn and the economy picking itself up again and resuming its upward course, albeit at lower growth rates. Why does this pattern keep repeating? What could be going on?

1. The government keeps spending from its $3 trillion reserves stash and through direct fiscal policy it keeps Chinese workers employed and thus avoids the worst of the business cycle. (NB: This is in general not a good understanding of what is going on, but it should make the list of possibilities.)

2. Worker productivity is going up ??% each year, through the importation of technical progress and the capture of low-hanging fruit. So China keeps on hitting negative shocks, sticky nominal wages won’t fall, trouble is about to hit but then higher productivity kicks in quickly to keep unemployment down. The economy then resumes its upward course, although hitting some bumps and snags along the way.

3. State-owned enterprises are told to keep on producing more and investing more. This worsens their long-run profitability problems, due to collective excess capacity. But in the short run (how long is that short run now?) both aggregate demand and aggregate supply stay fairly high. When the profitability constraint hits, though, it will be a doozy. Unless of course the government resorts to #1, postponing the problem even further.

4. China already has hit a recession in terms of living standards, we are simply mismeasuring the rate of inflation in the country. And since real wages are falling (for some workers) and nominal gdp stays on a decent (or maybe even excessive) growth path, the country does not experience a traditional recession.

5. Through the use of monetary/fiscal policy and SOEs, the government keeps on boosting the supply of credit. Since there has been a significant underemployment of resources in China, higher credit induces a self-sustaining positive response from the supply side. There are then two options for the future:

a. China is still at a margin where this credit process is largely self-financing, or

b. China is now at a margin where soon enough the bills can no longer be paid.

I am not seeking to persuade you of any of these views, I am simply listing some possibilities.