It has been obvious for most of this year that China's economy is in trouble. As the blog wrote in the Financial Times in March:
"PTA is thus warning that China's economy could be slowing faster than generally realised".
Yet it is hard for the government to move beyond short-term responses:
• The new Politburo leadership is still not yet decided. Speculation over the health of expected new president Xi Jinping only adds to the sense of a power vacuum
• Food inflation is moving higher. At 3.4% in August, it increases the risk of social unrest, as China's predominantly poor population spend much of their income on food
• House prices remain far too high, at 14x average incomes in the Tier 1 cities. Yet house market volumes are rising again, as people expect current restrictions to be reduced
The problem is that China needs to move beyond central control of the economy. The likely new leaders know this, and supported the World Bank's 2030 analysis of the issue back at the Party Conference in March.
But this would mean less power for the People's Liberation Army and the State Owned Enterprises. In turn, it would mean reducing opportunities for major wealth creation within the political elite. As Italian political savant Nicolo Machiavelli wrote 500 years ago in The Prince:
"It must be remembered that there is nothing more difficult to plan, more doubtful of success, nor more dangerous to manage than a new system. For the initiator has the enmity of all who would profit by the preservation of the old institution and merely lukewarm defenders in those who gain by the new ones."
Unsurprisingly, the government is now moving to reassure these powerful sectors. As the chart shows (red square), last month's lending was a new high for August. This money will flow straight to them. Only 15% of bank lending goes to those who really need it in the smaller companies.
So far, therefore, the leadership transition is playing out as expected back in July, when the blog suggested that
"The outgoing leadership seems to have chosen to do enough in the way of new lending to keep the show on the road, until the new leaders are selected in H2, (when they will) then bow out gracefully."
What happens then, remains anyone's guess.