Chinese GDP Grows by 10.2% in First Quarter: Domestic Politics and the Boom-Bust Cycle

New Chinese growth statistics have come out. In the first quarter of 2006, Chinese economy grew at 10.2%, which is the fastest in the past ten years. Morgan Stanley’s Steve Roach was wrong again.

Anyone who is familiar with the political-business cycle in China, however, will be even more surprised by this new development. In China, there has been a five-year business cycle coincident with the Communist Party’s national plenary meeting, in which new five-year plans will be discussed and ratified, and most importantly, major personnel decisions will be made.

Year 2006 however, is the last year of the 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. 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. Year 2007 is going to be an exciting year!