BEIJING (Reuters) - China's policy chiefs have about two weeks left to decide about giving the economy a proper stimulative prod, or risk parading a new Communist Party leadership to the world just as growth falls below target for the first time in nearly four years.
Factory activity is already at a nine-month low, according to the latest manufacturing sector survey from HSBC, signalling 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."
The leadership change should come against a backdrop of prosperity and stability - thereby justifying the Party's grip on power - which means politics are more important than usual to policy decisions in China's carefully choreographed economy.
But further stimulus risks exacerbating China's main policy bind - how to respond now even though it has not reversed the speculative consequences of the 4 trillion yuan (401 billion pounds) stimulus during the global financial crisis of 2008-09, while still cleaning up bad debts run up by local governments.
There are concerns that even more fixed-asset investment - already worth about 50 percent of GDP and at a level that worries the International Monetary Fund - would simply add to China's existing stock of inefficient economic capacity.
Added to that is a standoff among the Party's intellectual elite over whether stimulus would further widen the already chasm-like gap between China's urban rich and rural poor.
Existing monetary easing measures have not yet fully filtered through the economy and with only weeks to go before the end of the third quarter, there may not be enough time to significantly affect the outcome with another policy push.
Further limiting what policymakers can achieve is the fact that the big drag on China's export-oriented economy lies well beyond Beijing's borders in debt-ridden, recessionary Europe.
Talking up the economy could be the most expeditious option.
About a dozen local governments in the last month have been reported by Chinese media as unveiling multi-year investment plans worth trillions of yuan - mostly unfunded and likely to be simple restatements of blueprints in official five-year plans.
They have, nevertheless, fed market talk that Beijing is set to spend big to fight the worst economic downturn since 2009, with growth on course to hit a 13-year low of 8 percent in 2012.
Premier Wen Jiabao has begun to exhort the virtue of having confidence in the economy in tough times, after pledging since autumn 2011 to stabilise it with proactive, pro-growth policies.
He did so again on Saturday on a visit to the export hub of Guangdong, where he pledged to step up support for the economy and improve business confidence.
While Wen's words so far have heralded two interest rate cuts, freed about 1.2 trillion yuan for new lending from bank reserves, given tax breaks to small firms and accelerated some infrastructure spending, they have yet to bring stability.
China's economy has been sliding for six straight quarters and analysts fear it will do so for a seventh, pushing back their expectations of a growth rebound into the fourth quarter from the third quarter - far behind earlier predictions of a bottoming out in the first quarter of this year.
Many economists though see politics as the ultimate insurance policy, with preventative action to underpin growth in the second half of the year guaranteed the worse the data gets.
"This is no longer pre-emptive. They are already behind the curve," said Qu Hongbin, chief China economist at HSBC, sponsor of the factory activity survey that triggered the latest wave of worry about the world's No.2 economy.
"But we're not talking about the Fed here, so it's very difficult to pinpoint what exactly they are doing, or when exactly they will do it," he added.
Qu says infrastructure spending is the surest way to get the economy quickly back on track.
Rising infrastructure investment and an average annual 20.7 percent increase in fixed-asset spending each month so far in 2012 as other data points to growth slipping suggests it might already be happening.
"Most important is loan supply and whether more will be given to local governments for their investment projects," Zhang Zhiwei, chief China economist at Nomura in Hong Kong, said.
"If the data continues to surprise on the downside, local governments will get more bargaining power and their requests to the central government will become stronger," Zhang said.
A jump in new lending would signal to investors that capital is being channelled into infrastructure spending. The total value of new lending so far this year implies it will hit 8 trillion yuan - expansionary versus 2011's 7.5 trillion yuan.
Money supply analysis by MES Advisers' Paul Markowski, a long-time consultant to China's monetary authorities, indicates an imminent turn in GDP and negates arguments for doing more - especially as the data also signals rising inflation.
That's a red flag for policymakers anxious to stop price hikes gnawing at workers' spending power and only a surge in unemployment would override it.
HSBC's Qu says jobs are already at risk.
"You don't have to wait until millions of people are thrown out of the factory doors before you act," Qu said. "The bottom line is that this should be a wake-up call for them to do more."
China's 2008-09 stimulus came as at least 20 million Chinese jobs were axed in a matter of months as world trade ground to a halt in the depths of the global financial crisis.
But while the IMF's 3.5 percent 2012 forecast for global growth is hardly perky, the world is in better shape than late 2008 when Wall Street banks toppled over and trade finance froze.
That makes Tim Condon, head of Asian economic research at ING in Singapore, question calls for tactical action ahead of the transition. He says something more strategic may be at play.
"A bad year is not the end of the world for the Party. The new leaders come in, turn things around in 2013 and look like heroes," Condon said, adding that aggressive stimulus would thwart policies to fight speculation and rebalance the economy.
"What they seem to be saying is that they are not going to take the easy way and double down on the command and control policies, but stay on the course of market-oriented reform," Condon said. "That's a really positive story - if it's true."
Editing by Neil Fullick