[Note: below is a guest post from Mark DeWeaver]
The Asian Development Bank has just published its Asian Development Outlook for 2013. Turning to the “Economic Prospects” section for China (on p. 157 of the report), we find that the ADB is expecting GDP growth of 8.2% for this year, up from 7.8% in 2012. Next year, however, growth is expected to fall to 8.0% as the new leadership replaces the “previous pursuit of fast-track growth” with a new approach focusing on the “quality, efficiency, and the sustainability of economic growth”
While I agree that faster growth is likely this year, I don’t see a new approach to economic development leading to a slowdown in 2014. There are two things wrong with this idea:
First, there is nothing new about the “new approach.” Every five-year plan (FYP) since the Sixth, which ran from 1981-1985, has stressed the importance of transitioning to a more efficient “mode of growth.” Consider the following history of official statements on this issue (all taken from various issues of the Zhongguo Jingji Nianjian [Almanac of the Chinese Economy]):
In 1982, then-Premier Zhao Ziyang told the National People’s Congress that “raising economic efficiency” was to be the “center of all economic work” during the period of the Sixth FYP.
In 1985, describing the Seventh FYP, Zhao told the National Party Congress that “we must not one-sidedly pursue excessively high economic growth rates.”
In 1991, Zhao’s successor Li Peng told the National People’s Congress (NPC) that the Eighth Plan not only had “clear requirements for the speed and quantity of growth,” but “an even greater emphasis on raising the quality of economic growth.”
In a 1996 speech to the NPC on the Ninth Plan, Li called for “actively advancing the economic structure” and “the fundamental transformation of the mode of economic growth.”
Zhu Rongji, Li’s successor as premier, put the case even more emphatically at the March 2001 National People’s Congress. During the period of the Tenth Plan, structural adjustment would be the “main line.” China had, Zhu said, “already reached a point at which further development would be impossible without adjustment.”
In 2007, Hu Jintao told the National Party Congress that during the Eleventh Plan period China would transition to “scientific development,” which he defined as development that is “comprehensive, balanced, and sustainable.”
As it turns out, economic efficiency has been a central government priority since the early 1980s. Yet progress in this area has been elusive. The share of investment in GDP continues to grow at the expense of household consumption even as income inequality becomes ever more severe.
The second problem with the ADB’s 2014 forecast is the fact that local officials’ “investment enthusiasm” (as the Chinese call it) is always strongest immediately after Communist Party congresses. Many officials get new assignments around the time of these meetings, which are held every five years. Generally they want to start new projects right away, in order to ensure that as much of the resulting GDP growth as possible will occur while they are in office.
The five-year peak-to-peak period of the typical Chinese investment cycle is thus closely linked to the timing of Party congresses. All six of the investment cycle tops that have occurred since 1977 happened within the first two years following a congress. And every congress except the 1997 15th Congress has been followed by a top within the following two years. (See Chapter 4 of my new book, Animal Spirits with Chinese Characteristics, for a detailed history of the Chinese investment cycle.)
Given that a Party congress was held at the end of last year, this suggests that investment growth is unlikely to slow in the second half of this year as the ADB is expecting.
The ADB believes that this time will be different because of the leadership’s “new approach.” But given that this new approach is already over 30 years old, it’s hard to see why a transition to a new “mode of growth” should now be the basis for anyone’s baseline forecast for the Chinese economy.
Mark DeWeaver manages the emerging markets fund Quantrarian Asia Hedge and is the author of Animal Spirits with Chinese Characteristics: Booms and Busts in the World’s Emerging Economic Giant.