China's leaders have a lot to worry about. The purge of Bo Xilai has now been followed by news of his wife being suspected of murder. This makes the run-up to October's leadership transition even more difficult.
Only 3 months ago, Bo was being tipped by some to join the Politburo, and even to become premier. Li Keqiang, the long-time favourite for the post, seemed to be under pressure from Bo's populist campaign and his strong army connections.
Now Bo is gone, but many of his supporters are still in powerful positions. This means that major new policy initiatives are unlikely, due to the need to try and rebuild a consensus amongst the top Party leaders.
China's lending policy offers a fascinating example. It was the focus of the massive 2009-10 stimulus programme, when lending was doubled in 2009 to reach 1/3rd of GDP. This credit boom, of course, led to rampant inflation in consumer and food prices, as well as in real estate.
Now China has to achieve a difficult balancing act. It needs to slow credit growth enough to keep inflation under control, but not too much to cause housing markets to crash. Its answer, given the political paralysis at the top, is to stick to previous targets and to fine-tune some details. As the chart shows:
• Lending (red square) was well below target at the end of February
• It therefore surged in March to hit the Q1 Rmb2.4tn target ($380bn)
• Now the State Council is discussing "fine-tuning" policies
• It aims "to leave more room for new policies and prepare for hardships and challenges"
Of course, China does not only face major political challenges. It also has to transition from an export-based economy to one more based on domestic consumption, as we discussed in chapter 6 of 'Boom, Gloom and the New Normal'. And it has to do this when key markets such as Europe are on the edge of recession.
The problem with restructuring the economy is that it requires a complete change in approach. New figures show urban residents had average per capita disposable incomes of just $1079 (Rmb 6796) in Q1, whilst rural residents (50% of the population) had just $406. And it is the rural areas where consumption growth is most required.
China's sudden lending boost in March may therefore not be the last panic reaction to an increasingly difficult political and economic landscape.