Little evidence of reform so far from China's reformist leaders
Despite weakening activity in key sectors, the new leadership team shows little desire to implement sweeping economic liberalisation
Investors found Friday's news that China's economic growth rate accelerated in the third quarter encouraging.
Coming on top of the latest deal to raise the US debt ceiling, the release fuelled a modest rally in financial markets, with the Hang Seng Index rising 1 per cent on the day.
But financial markets take a notoriously short-term view. Try to peer a little further into the future, and if you are an optimist, the pick-up in China's growth to 7.8 per cent from 7.5 per cent in the previous quarter becomes mildly troubling. If you are a died-in-the-wool bear, it begins to look downright scary.
To bulls, the latest data looks troubling because of the weaknesses that lie behind the strong headline number. Although the overall growth rate was higher in the third quarter, September's figures revealed that activity in key sectors was weakening.
The growth rate of industrial production slowed 10.2 per cent from 10.4 per cent a month earlier. The growth of fixed-asset investment fell, too, while retail sales also grew more slowly.
Noting the pattern, many China-watchers predicted a weaker performance in the last quarter of the year.
"This could be as good as it gets," commented analysts at Capital Economics.
"The recovery ended in the third quarter," added Nomura economist Zhang Zhiwei, forecasting a growth rate of just 6.9 per cent for next year.
Most observers don't find that prospect too unnerving. They have already accepted that China's days of double-digit economic expansion are over.
And with hopes high that the country's new leadership will set out an agenda of free-market reform and liberalisation at next month's Communist Party bunfight in Beijing, they believe slower growth will assist a much-needed rebalancing towards a more consumer-driven economy.
That's the optimistic viewpoint.
The pessimists, meanwhile, doubt either the leadership's appetite for liberalisation or its ability to apply real reforms.
They note that more than six months after the new leaders were installed in their offices of state, and almost a year after they took the reins of the Communist Party, China's new generation of reformers has yet to announce any actual reforms.
Instead, this handover of power, like previous transitions, has been marked by a pronounced expansion of credit to fund a pick-up in state-backed investment.
The first chart below shows the year-on-year growth rate of total social financing - Beijing's broadest measure of economy-wide credit.
Although the latest financing splurge is dwarfed by the massive lending binge of 2009, it is still bigger than the credit spree that funded China's pre-Olympics investment boom.
The difference this time is that China is getting less growth bang for its credit buck. With much of the industrial sector suffering from overcapacity, companies have proved reluctant to invest in new plants.
As a result, the latest credit expansion has shown up most clearly in the property market, where prices have risen sharply in recent months.
But with underlying activity in the real economy relatively sluggish, the continued growth of credit, especially through the shadow financing market, has heightened fears that China is heading towards a severe debt crisis in a couple of years' time.
A vigorous programme of economic reforms, including interest rate liberalisation, the deregulation of state-dominated sectors, plus land and household registration reform, would help fire up new engines of growth.
But the pessimists hold few hopes for next month's party plenum, which they say is aimed primarily at cementing the new leadership's grip on power. They expect lots of ideological gobbledegook, but few, if any, detailed policies.
Precedent, it has to be said, favours the pessimistic view of the plenum. Still, perhaps this time really will be different.