In this series of articles, I will examine the basic factors driving China’s economic policies under President Xi Jinping, taking into account the nation’s recent history and long-term challenges, as well as the latest economic data released by the government. In this first article, I assess the likelihood of a new round of stimulus measures in the light of current trends and past experience.

Recent Economic Trends

Judging from the latest economic data released by the National Bureau of Statistics (see table), industrial output, consumption (retail sales), and investment were all basically stagnant during the first five months of this year. Meanwhile, export figures for May fell sharply, as the government cracked down on the practice of inflating export reports. By contrast, the value of home sales soared, supported by the relatively rapid growth in the money supply. Steps to rein in the real estate market, adopted at February’s State Council executive meeting under outgoing Premier Wen Jiabao, seem to have backfired, triggering a run on the housing market.

China’s Major Economic Indicators, 2013

(% change from year earlier)

As a whole, the Chinese economy is rebounding less quickly than the government had anticipated. Last fall the Chinese Academy of Social Sciences predicted 8.2% growth in gross domestic product for 2013, only to revise its forecast down to 8.0% in its spring report and more recently to 7.5%–8.0%. The International Monetary Fund has scaled back its growth forecast for China as well; speaking in Beijing on May 29, First Deputy Managing Director David Lipton said the IMF expected GDP growth in the vicinity of 7.75%.

I have become more and more convinced of late that we need to start focusing on China’s quarterly growth rate in relation to the previous quarter, as we do when gauging economic growth in Japan and the West. China’s quarterly growth is currently calculated by comparing each quarter’s GDP with output during same period the previous year, a method that paints a very different picture.

For example, during 2012, China’s official quarterly growth figures, calculated year-on-year, were 8.1% (Jan.–Mar.), 7.6% (Apr.–June), 7.4% (July–Sept.), and 7.9% (Oct.–Dec.). These figures suggest declining growth in the first three periods and a rapid recovery in the fourth. But quarter-on-quarter growth for the same period was 1.6%, 1.9%, 2.1%, and 2.0%, indicating that the recovery was actually gaining moment until the fourth quarter, when it began to sputter.

In the first quarter of 2013, meanwhile, year-on-year growth was 7.7%. But growth over the previous quarter was 1.6%, which translates into an annualized growth rate of only 6.4%. Moreover, while the year-on-year figures suggest that economic growth slowed abruptly in the first months of 2013, the quarter-on-quarter numbers yield a much more natural curve. In my view, tracking quarter-on-quarter growth would be a more reliable way to gauge economic trends.

To be sure, quarter-on-quarter growth for the most recent period must be regarded as tentative; as the NBS acknowledges, the latest quarterly GDP figures are always preliminary and are routinely revised three months later. Still, the available data strongly suggests that China’s economic recovery began to stall in the fourth quarter of 2012 and that the annualized rate of growth in the first quarter of this year was actually less than 7%. Such a rate of expansion would be more consistent with the year-on-year growth in electricity consumption—once cited by Premier Li Keqiang as a more reliable indicator than government GDP data—which fell to 5.5% in the January—February period and a mere 2.0% in March.

Standing Firm?

In November 2008, in response to the deepening global recession, the Chinese government adopted a massive economic stimulus package involving 4 trillion yuan in government spending, along with structural tax cuts and aggressive steps to loosen credit. These measures spurred a renewed burst of growth, boosted employment, and greatly enhanced China’s position in the world economy. But the stimulus also had negative side-effects, including rising inflation, a surge in housing prices, growing surpluses in production capacity, and burgeoning public debt at the local level. As a result, the Chinese economy today faces significant financial risks, and any substantial expansionary measures now could fully expose those risks.

At the April 17 meeting of the State Council Standing Committee, the government’s top leaders assessed the nation’s economic situation and announced that they would stay the course on economic policy. Just eight days later, on April 25, the CPC’s seven top officials gathered for a special meeting of the Politburo Standing Committee (the nation’s de facto top decision-making body), apparently for no other reason than to reaffirm this rejection of any major policy shift.

The second meeting stands out for several reasons. First, the Politburo Standing Committee does not routinely publicize the time or content of its meetings. Second, the Politburo had held a plenary meeting just six days earlier, on April 19, apparently without touching on economic policy. (According to reports, the subject of the meeting was populist education within the party, and the subject of the Politburo seminar held later the same day was dealing with graft and corruption.) In this context, it seems clear that the Politburo Standing Committee felt obliged by subsequent events not only to give renewed attention to economic policy on April 25 but to publicize the meeting’s content.

Those subsequent events were the April 20 Lushan earthquake in Ya’an, Sichuan, and the outbreak of H7N9 avian influenza around the same time. We know that the Politburo Standing Committee met on April 23 to discuss relief and rescue operations in Lushan county. The fact that it met again two days later suggests that China’s leaders felt impelled to revisit economic policy in the light of the quake and the flu outbreak.

Such action is scarcely without precedent. In the first half of 2003, as the epidemic of the severe acute respiratory syndrome (SARS) spread through southern China, experts warned that the outbreak could have a serious impact on consumption and adversely affect the service sector. In response, Premier Wen Jiabao convened a series of State Council standing-committee and plenary meetings in May and June, and the government adopted a package of emergency measures to prop up the economy, centered on public spending. This fueled an investment frenzy that overheated the economy once the SARS epidemic had subsided.

Similarly in the wake of the May 2008 Sichuan earthquake, the government kept a fairly tight rein on the economy in the first few months of 2008, after the soaring stock and real estate prices of 2007 raised the specter of an asset bubble. Then the subprime mortgage crisis hit, and the world economy began to contract, undercutting Chinese exports. In June, following the Sichuan earthquake, politicians at the central and local level met to hammer out a macroeconomic course correction, and in November the government announced its 4 trillion yuan economic stimulus plan.

Going all the way back to 1998, we see a similar pattern after Zhu Rongji took over as premier. Until then, the government had been pursuing a fairly tight macroeconomic policy in an effort to keep a lid on inflation. But during the first half of 1998, the East Asian financial crisis began taking a toll on Chinese exports. That summer, northern China suffered devastating flooding, and in August Zhu shifted to a policy of fiscal expansion and easy credit.

Since that time, each Chinese premier has faced a major disaster the first year of his term. And each time, in the face of growing pressure from local officials, he has been obliged to shift to a course of fiscal expansion and credit easing.

Mounting Pressure

This year as well, the government stood firm at the outset, determined to push ahead with economic restructuring policies, even as growth began to sputter in the first quarter of 2013. Local officials were naturally dissatisfied with the low level of investment. With the bird flu outbreak and the earthquake in Sichuan, that dissatisfaction doubtless erupted in calls for macroeconomic measures to shore up the economy. At this point, the government probably decided it had no choice but to convene a special meeting of the Politburo Standing Committee to deliver a top-down decision against any fundamental change in policy.

Premier Li Keqiang drove the point home in a State Council teleconference on May 13, explicitly rejecting the idea of a major stimulus of the type implemented in 2009–10. “Even if we were willing to rely on pump-priming measures and government investment to reach this year’s economic targets,” he said, “we are already running out of room to maneuver.” At the same time, he stressed that government-powered growth “is not only difficult to sustain but raises new problems and risks.”

But the pressure is likely to mount in the coming months. In June and July top government leaders frequently visit the countryside on inspection tours. And once the GDP figures for the third quarter are released, the premier will be chairing cabinet and Politburo meetings as well as consultations with non-party representatives to review economic conditions and discuss government policy for the remainder of 2013. If growth continues to lag, the provinces will step up demands for fiscal intervention, and the nation’s new leadership will surely find them difficult to resist.