Investors worry more about China’s slowdown than about Federal Reserve Board chairman Ben Bernanke’s “taper,” according to a recent informal poll. Goldman Sachs expects the Chinese economy to grow by 7.4 percent this year. That’s way down from 10.4 percent in 2010, 9.3 percent in 2011 and 7.8 percent last year. If the investment firm is right—others put this year’s figure as low as 6 percent if the regime really means to engineer a credit crunch—this will be the first time since the 1997 Asian crisis that China does not hit the target set by its central planners, a relatively modest 7.5 percent. And it might be the year in which a slowdown in China is felt in America, aborting our fragile recovery. But only “might”: The recovery here has increasingly strong support from the housing sector and from rising consumer wealth and confidence, which is what prompted the suddenly garrulous Bernanke to discuss in detail—with dates—plans to tighten monetary policy if the recovery picks up a real head of steam. That important “if” escaped the notice of most traders, who scurried to the bond and share market exits.

President Obama was the first to threaten the economic recovery: he raised taxes. Next came the Republicans in congress: they cut spending, tightening fiscal policy too much and too soon. Now it is China’s turn: President Xi Jinping ordered a credit squeeze—the People’s Bank of China is not an independent central bank—in order to stifle conspicuous consumption by his Communist Party elite and their offspring, and rein in excessive, risky lending by China’s shadow banking sector. That sector includes everything from loan sharks to pawn brokers to leasing companies to trusts (rather like our hedge funds). Even though the PBOC decided last week against visiting on China its very own Lehman moment, and relaxed the credit strangle that had dried up interbank lending, the message is clear: “end excessively rapid expansion of credit or, as we have demonstrated, we can make you wish you had.” Right now, private-sector businesses are scrambling for cash.

Pause here and read this warning label. Chinese statistics are not as informative as they might be. The cooking of books is a Chinese culinary skill that results in the feeding of flawed information to analysts, who understandably have difficulty digesting the information. China’s premier Li Keqiang has delicately described his country’s GDP figures as “man made,” and Kevin Jainjun Tu, a senior associate at the Carnegie Endowment for International Peace, refers to data on the energy sector as “increasingly questionable.” The Heritage Foundation’s Asia expert, Derek Scissors, is less delicate than premier Li. “The State Statistical Bureau … never reports a genuine unemployment number. … Housing prices, non-performing bank loans, and coal production… disappear from view when outcomes turn sour….[GDP] numbers are virtually useless.”

Still, China-watchers are obliged to take a guess at what is going on in a country that David Shambaugh, the professor who heads George Washington University’s China Policy Program, tells us is the world’s second largest and for the past twenty years the fastest growing economy; is the world’s largest merchandise exporter and the second largest importer and recipient of foreign direct investment. These and similar statistics, more or less plausible, should give you some idea why policy makers everywhere worry that if China sneezes the rest of the world will catch a cold.

Here is what seems to be going on as the new regime gets its feet under its desks. And many desks there are in a centrally directed economy in which the government decides which state-owned enterprises get the credit needed for expansion, and provides subsidies to 90 percent of the 2,400 companies listed in mainland China, according to Highthink Flush Information Network, a provider of financial data. The powerful National Development and Reform Commission employs 30,000 bureaucrats to implement the regime’s industrial policy, Wang Kan, a professor at the Institute of Industrial Relations in Beijing told Bloomberg Businessweek. Those subsidies jumped 23 percent last year, and account for 30 percent of industrial output according to Usha and George Haley, professors at West Virginia and New Haven Universities, respectively. Don’t let the Commission’s name fool you—reforming itself out of business is not as high on its list of priorities as reforming the economy seems to be on the lists of premier Li and president Xi Jinping.

Li and Xi know that excessive credit expansion has its roots in the willingness of the central bank to pour money into loss-making state-owned enterprises (SOEs) that are inefficient and generally operate in industries suffering from excess capacity. They know, too, that the shadow financial system recycles money it borrows cheaply from state banks into risky financial products. And that if their plans to liberalize the economy are to succeed, if they are to make the flow of credit more responsive to market forces, they must take on the powerful institutions—banks, SOEs, local officials who direct credit to well-connected individuals and companies, often in return for the bribes that fund ostentatious displays of haute couture, flash cars, and special privileges by party elites, to the mounting annoyance of the nation’s still-poor masses. Experts disagree on the extent to which Li and Xi are willing to rile the regime’s power brokers, and risk the political liberalization that would inevitably accompany a surrender of the power of life and death over China’s most important economic players. The fight-back has already begun. In a front-page article The People’s Daily, generally regarded as the voice of the Communist Party, points out that SOEs are stronger than they have ever been, that 54 of them are on the Fortune 500 list of the 500 largest companies in the world, that 117 of the SOEs have paid total taxes that are rising at an annual rate of 20 percent. If that failed to get the premier’s attention, the article, reported in the Financial Times, concluded, “While many people still hold the idea that Chinese state-owned enterprises are ineffective and incompetent, companies which do everything but do nothing well, in fact they have quietly undergone a beautiful transformation.” Think about that, Li Keqiang.

It is not at all clear that Li’s version of market reform bears any relation to that term as it is understood in democratic, market economies. Li has ordered government departments to develop plans to move more than 100 million Chinese into cities from rural areas over the next decade. This is a stimulus program, Chinese style, aimed at creating investment, jobs and, according to Li, “a new type of urbanization that puts people at its heart.”

Urbanization will run alongside Xi’s program to have officials attend self-criticism sessions and go to the countryside to learn from the peasants, at least those that have not been relocated to new urban areas. If this great leap forward fails to stem the decline in China’s growth rate, several economies around the world might be among the victims.

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