PBOC FTW

Last week I posted: China's Corruption Drive Still Clearing the Decks for Reform; Why 2008 Stimulus Will Not Be Repeated. There's lots of links in that post, but my basic argument was that the reformers (economic) are winning and the corruption drive is a part of consolidating power. Among the ministries and departments, the PBOC falls in the reform camp; the Ministry of Finance, which cooked up the 2008 stimulus, is their "nemesis" and grabbed power from the PBOC back in 2005. Following the fall of Bo Xilai, economic reforms quickly restarted and the PBOC has been winning its turf battles, which is why I lean towards taking Li Keqiang's public statements at face value. Until there's evidence that the reform camp has hit a major wall.

On the resistance front: After powerful start, Li Keqiang's frustration grows with resistance to reforms

Li and his cabinet were praised for their determination to push for economic restructuring, for resisting calls for economic stimulus and for trying to rein in debt to contain financial risk.

In particular, Li staked his premiership on forcing officials to streamline and delegate government regulatory powers to allow a more decisive role for market forces in the economy. He vowed his cabinet would "display courage like a brave man cutting his own wrist" to push for restructuring.

Several months later, and buzzwords like Likonomics have vanished from the mouths of the media and economists as downward pressure on the economy gathers pace amid rising international concerns over political and economic uncertainties on the mainland.

Nowadays, Li, known for his scholarly manners, has started to show his frustration openly.

According to mainland media reports, Li chaired at least two cabinet meetings over the past two weeks to focus on ways to streamline and delegate government regulatory powers.

At one meeting, on May 30, Li reportedly pounded the table as he blasted local officials for inertia in carrying out central government directives.

He accused departments of micromanaging the economy and wasting time and resources examining and approving projects and deals that were entirely commercial matters unrelated to national security or strategic industries.

Li vowed to do whatever it took to keep his promise to remove and delegate more than 200 administrative approval procedures by year's end.

......The ambitious reform drive, trumpeted by President Xi Jinping and Premier Li, is now entering a stalemate even before the real battle against vested interests and state-sector monopolies has barely begun.

Clearly, Li is not speaking solely for public consumption. The reform effort is serious. Resistance, if successful, will come from a weakening of the current leadership, not because the leadership secretly doesn't want to reform.

Still, China's Central Bank Prevails in Policy Battles Over Economic Future

The government has sought to portray a united front on its "mini-stimulus" measures, or small adjustments to monetary policy to bolster growth.

Behind the scenes, however, China's biggest economic agencies—the People's Bank of China, the Ministry of Finance, the state planning commission and other financial regulators—have fought over whether more should be done to bolster growth, such as cutting interest rates for the first time in two years, according to officials familiar with the government's deliberations.

......In the latest battle, the country's top banking regulator on Friday said it would ease rules to make it easier for banks to lend only to small companies. That followed a decision a week earlier by the State Council, the government's top decision-making body, to target more bank funding for small businesses and farms.

The central bank fended off calls to cut interest rates, at least for now, the people familiar with the situation said, by arguing that a rush of new credit could add to already ballooning debt and funnel money to the real-estate sector, which is struggling with a housing glut that is dragging down growth and threatening to trigger loan defaults.

"Theoretically, conditions are ripe for a rate cut as inflation is not a concern right now," a central bank official said. "But it wouldn't be as effective as we would want it to be" because it could worsen other problems in the economy.

Since this is a credit driven slowdown, the central bank is the most powerful institution.

Things get interesting when you consider that the weaker the economy gets, the stronger the resistance will grow, but also the weaker it becomes (in terms of stability). If the leadership was purely Machiavellian, they'd let the market clear. It would expose all of the corruption and leave the indebted and poorly managed SOEs with no choice except to take whatever terms accompanied a bailout. If the banking system was also allowed to teeter, it too could be forced to except the terms of its bailout. On the flip side, if the leadership is successfully fought on stimulus, the economy will pick up (in the short-term) and local governments and SOEs will be in a stronger position to further resist reforms. The leadership would like to see reform proceed smoothly and then allow some limited intervention to smooth the economy, but if reform is blocked politically, there's always the market.