Chinese political cycle has no clear influence on economic cycle6 October, 2012, 17:45. Posted by Zarathustra
Since the confirmation of the date for the Communist Party Congress, the expectation is that the government will then somehow pull the trigger and stimulate the economy.
Earlier, we posted two charts showing the dates of Party Congress and the performances of Hong Kong as well as Chinese stocks markets. Instead of being a good time to buy stocks, the Party Congress appeared to mark the moments when one should avoid buying stocks. Now given that the Chinese stocks weakness, particularly in the onshore market, you are justified to ask the question of whether this time is different. On the whole, we do not think that anyone should read too much into such findings, simply because we have very few political cycles to look at, and the fact that Party Congress happened at the time of some sort of economic crisis in the past could well be mere coincidences.
In terms of economic growth, the notion that the political cycles have something to do with that appears to be just as superstitious. The chart below from Barclays Capital shows the GDP growth and growth in fixed asset investment and the timing of Party Congress.
Source: Barclays Capital
In terms of GDP growth, there is no evidence at all that growth will pick up in the following year after the Party Congress. In terms of fixed asset investment, growth picked up in the years following the Party Congresses. Because of the pick-up of investments, some believe that the same will happen again next year.
To us, however, it will be very unwise to make any predictions as to what will happen after the Congress by looking at the chart above, and we are certainly able to make the case that something completely opposite will happen (as far as fixed asset investment is concerned). For instance, given the sense of urgency of the government to rebalance the economy, one can justifiably expect that fixed asset investment growth will not pick up in the year following the Congress (so long as the new leadership shares such view), and thus GDP growth will slow even further. If this outcome became the reality, then the expectation that investment growth and economic growth will pick up next year based on the last 3 political cycles will become completely wrong.