Earlier this week, one reader parroted a familiar refrain: China isn’t headed for a recession because the Chinese economy is going to grow this year by about 5%.

Let me clarify a few things. First, a “recession” in the Chinese context doesn’t necessarily have to mean an economic contraction. A “recession with Chinese characteristics” (if you will) could be a prolonged period of what, for China, would count as very subdued growth courtesy of ongoing drag from the property sector, moribund consumption and lackluster external demand. That’s pretty much where we are now.

China is also at risk of a balance sheet recession. Just ask Richard Koo, who spent nearly an hour regaling Bloomberg’s Odd Lots podcast last month. “What Chinese economists are worried about is that China may be falling into what I call [a] balance-sheet recession,” he said. “They have been calling me very frequently these days. I was told — I have no way to prove this — but one Chinese professor told me that about half of the PhD dissertations written on economics in China today are based on my work on balance sheet recessions.”

Second, there’s no way to know how the Chinese economy is actually performing. We can get a pretty good idea from the official data, sell-side efforts to parse that data and also from private firms who conduct their own, independent research that doesn’t rely on the official figures. But we still have to depend quite a bit on the Chinese government which, on the off chance you aren’t aware, is a brutal totalitarian dictatorship beholden to a man who fancies himself a 21st century Mao.

Third, there’s no such thing as a “recession.” That’s just a word we made up to describe economic malaise. God didn’t formalize the distinction. (“Then God said, ‘Let there be growth’; and there was growth. And God saw that growth was good; and God separated growth from de-growth. God called the growth expansion, and the de-growth he called recession.”) Lest we should forget, the two-quarter “rule” isn’t a rule. The NBER, America’s official recession arbiter, doesn’t recognize that rule, or any other rule for that matter. It was highly amusing last year to witness the consternation among seemingly every market participant and financial journalist under the age of 45 when their elders informed them that there isn’t actually anything written in stone anywhere about two consecutive quarters of negative growth being a recession. As long as we’re describing a state of affairs where the economy isn’t performing as it should relative to expectations or potential or forecasts or history, that can be a “recession.”

So, to reiterate, China is headed for a recession of some kind. That doesn’t mean it can’t be rescued, but every other day (and that’s barely an exaggeration) someone else downgrades their outlook for the Chinese economy. While no one at any sell-side firms is going to come out and suggest that China’s economy is likely to contract, this is what “recession” looks like in the Chinese context.

The Chinese government is apparently spending night and day devising new tweaks to buy time. As Rabobank’s Ben Picton put it, “Xi is resisting large-scale easing of credit conditions, urging ‘patience’ while the economy passes through what policymakers hope is a temporary soft patch, rather than the start of a Japan-style stagnation brought on by decades of malinvestment and speculative pump-priming of real estate assets.”

On Tuesday, reports suggested state-owned banks were set to cut rates on existing mortgages for first homes. The move would impact the “majority” of $5.3 trillion in loans, Bloomberg said, explaining that although average mortgage costs are already at a record low, “most of the Chinese households didn’t benefit as banks won’t reprice existing loans until the beginning of next year.” That underscores the urgency of the situation in the minds of policymakers. They want to revive consumption now. It can’t wait four months.

But this is problematic for banks, who have to make a living too. Recall that some analysts were confused last week when the five-year LPR tenor was left unchanged after the largest MLF cut since 2020. One explanation revolved around the notion that officials are concerned about bank profitability. Bloomberg’s Tuesday reporting suggested major lenders could cut deposit rates later this week, a step regulators have apparently blessed in a bid to “ease the burden” on banks, where executives are being asked to accept margin compression as the cost of performing a “national service,” as one US bank described the push to revive consumer sentiment in China.

This comes as lenders ponder their exposure to developer debt, which has increased 23-fold since 2008+. According to Goldman, around three quarters of that  sits on bank balance sheets. Goldman this month said total potential property losses could run to nearly CNY2 trillion, 60% of which would probably be absorbed by banks. They could handle that hit, Goldman said, “assuming defaults do not spill over into the mortgage book.”

Meanwhile, Liu Kun and Zheng Shanjie, a couple of Party functionaries, submitted reports to the State Council early this week. Xinhua published a recap on Tuesday. “The endogenous driving force for growth is not strong,” one of the reports noted. “The development environment is full of uncertainties, and the foundation for the recovery is still not solid.”

Again: That’s coming directly from Xinhua. So, if you think things are going ok in China, you should submit a report to the State Council. They’d be happy to hear some good news, because Liu and Zheng didn’t have much to offer. “From an international perspective, the external environment is more complex and severe,” their reports said. “From a domestic perspective, demand is insufficient, some enterprises are struggling to operate, risks and hidden dangers have accumulated in some key areas, and it is becoming more difficult to ensure and improve people’s livelihood.”

If that sounds like a recession to you, guess what? That’s because it is!

And that’s a problem for the Party. “The real question now is how strong the CCP and the PBoC’s resolve to address burgeoning debt-levels will be in the face of economic slowdown,” Rabobank’s Picton went on, in the same noted cited above. “For an authoritarian regime whose legitimacy is built on the delivery of rapidly rising living standards, slow growth poses a potentially existential risk.”