A new political economy: China grew at 10.9% in 1H06

China grew at 10.9% in the first half of 2006, and 11.3% in the 2Q, surprising almost all major investment banks.

"Maybe this is a new economy" said Stephen Green, China economist for Standard Chartered Bank, "Maybe China can grow fast without inflation"

I am not sure whether China can grow fast without inflation, but I am expecting the fast growth this year and I am not surprised at all.

As I wrote in the Bulletin back in April, things are changing in China. It may not be a "new economy", but it is certainly a "new political economy!"

The Communist Party's 17th national convention is upcoming in the second half of 2007, and thus major personnel promotion decisions will be made in the first half of 2007. Every provinical boss is working hard to secure political capital before the event, and GDP is the key political capital. In today's new political landscape where strongman politics is phasing out, GDP becomes more and more important a bargaining stake for provincial bosses.

So don't expect a slowdown in the second half. The economy is going to operate at full speed.

As I wrote in that article:

"Year 2006, however, is the last year of the 2002-2006 political cycle, and based on past experience, should grow at the lowest speed. The economy however grew at the highest speed in ten years. Something must have changed. One speculation is that the incentive structure has changed. In the past, provincial heads worked hard in the first and second year of the cycle to impress their national boss. Now they work hard in the last year to pro-actively build up political capital for their future career which will be decided in the 2007 national meeting of the Communist Party, and the best political capital in China is GDP, GDP, GDP!  At national level, central government wants to slow down the investment boom, but provincial bosses have made up their own minds. "