Economists struggling for a fix on the trajectory of China’s economy this year have focused on traditional drivers of growth, such as exports, investment and even consumer spending.
But most have ignored what may be the key propellant pushing output higher – top-level politics, in the form of the impending Communist party congress at the end of the year.
The party congress, held every five years, will consecrate the new membership of the ruling Politburo and be followed in March 2008 by the formation of a fresh government, with ministerial changes.
In line with their relative power in the Chinese political system, the party congress precedes and sets the tone for the government, which is formed in its wake.
In the year leading up to each of the past three party congresses and the subsequent formation of a new administration, fixed asset investment has soared and then peaked.
With investment accounting for nearly half of economic output in China, the increase has ensured that each incoming administration has been welcomed by a relatively buoyant economy.
Hu Jintao, the party secretary and president, is expected to win another five-year term and faces no obvious threat to his power. But even so, Mr Hu and his lieutenants will not want the dawn of a new administration to coincide with any slowdown.
Wang Xiaoguang, a researcher at a think-tank attached to the National Development and Reform Commission, the chief planning agency, said rises in investment with the political cycle were a form of “structural overheating”.
“The economy doesn’t get hot until the government gets hot,” he said. “As it is hard to increase consumption, the easiest way to boost GDP is to expand fixed investment.”
Even in the lead-up to the change of government in 1998, when China was being buffeted by the Asian financial crisis, investment rose markedly.
Higher investment has usually been driven at the grassroots, by local officials who, until recently, have had their performance judged solely by growth and job creation in their districts.
The political cycle has been mapped by Qing Wang, an economist with the Bank of America in Hong Kong, in a graphic charting the co-relation between investment and the formation of a new administration.
“If this pattern persists, fixed-asset investment growth in China appears poised to enter an upturn phase in the next two years through 2008 when the next change of governments is due to take place,” Mr Wang said in a research note.
Beijing is due to release official 2006 GDP data on Thursday showing that China has recorded double-digit economic growth for a fourth year in succession. China’s top economic planner last week put growth last year at 10.5 per cent.
Most Chinese and foreign investment bank economists have estimated growth this year will be below 10 per cent, significantly short of the recent peak of 11.3 per cent in the second quarter of last year.
But Mr Wang’s reading of the political cycle has prompted him to qualify his own estimate of 9.5 per cent. “The balance of risk is tilted to the upside,” he said.
Running against the political cycle this year, however, are a number of powerful countervailing forces.
Beijing itself has toughened its scrutiny of investment in an effort to cut what it regards as wasteful spending by local authorities.
The government, at both the central and local levels, also cannot command the economy in the ways it once did, with far more investment decisions in the hands of entrepreneurs.
“All of this may be somewhat less relevant these days because so much activity has moved from the state sector into the private sector,” said Arthur Kroeber, of Dragonomics, a consultancy in Beijing.