On Economy, Verbal Intervention May Be Key

After another disappointing round of manufacturing data last week, Reuters reports that Communist Party officials must now hurry if they want to inject optimism into the economy ahead of the upcoming leadership transition:

Factory activity is already at a nine-month low, according to the latest manufacturing sector survey from HSBC, signaling that the official August numbers for industrial production and trade published in a fortnight will foreshadow third quarter economic growth falling below the government’s 7.5 percent goal.

That is a deeply unappealing prospect for the Party’s top brass as GDP data is likely to be unveiled at roughly the same time as the new leadership in a once-a-decade power transition.

The only real option to deliver a growth spurt in the narrow time window open to policymakers is a boost to infrastructure spending. Indeed, verbal intervention may be the only answer.

“They are sending out the message that they want to stimulate the economy, but in reality that is not going to happen,” influential independent China economist, Andy Xie, told Reuters. “About the only tool left to them now is propaganda.”

China’s leaders face a conundrum, according to BBC News, as they prepare to hand over the reigns to the next generation at at time when the economy faces its worst run in years:

Recent efforts by China’s leaders to engineer a turnaround don’t seem to have worked. They have already cut interest rates twice, released more money into the economy by cutting bank reserve ratios, and announced a raft infrastructure projects.

The way to change things now would be to pump more money into building projects – and fast.

But investment spending already accounts for a huge 50% of China’s economy. The massive stimulus used to get China through the financial crisis led to inflation, worries about bad debts and soaring property prices and the government has been working to rein those in.

So if they do more now to achieve a short-term boost before the autumn Party Congress, then the result down the line could be a new, nasty bout of inflation, unpaid loans, and surging house prices, things the leadership says it’s determined to avoid.

For more on the global implications of China’s slowdown, The Economist has rolled out a stockmarket index called “Sinodependency” which is weighted by S&P 500 companies that have exposure to China.