Gradually, then suddenly.

China has been one of the huge success stories of the past thirty years. A totalitarian regime beginning to incrementally adopt a more open market, loosing forces for growth that have lifted hundreds of millions of Chinese from grinding poverty. That success has not been without challenges. Prosperity has also enabled military growth and regional territorial aspirations and power plays.

Economist have been concerned whether China was developing fast enough to become rich before it became grey. The heritage of the one-child policy was harnessed with the natural fertility fall which attends development to create a baby-bust which will begin having large demographic impacts soon. Impacts exacerbated because the baby-bust is also gender skewed - the one child-policy has resulted in dramatic sex-selection for boys among parents.

Political science people have been concerned that the openness required for a market economy would clash with the closed authoritarian government structure of the Chinese Communist Party which brooks no dissent. The market economy relies on price signals to function and price signals are a form of communication which are either allowed to function or not. They cannot be managed. There is an inherent conflict between rigid political control and a market economy.

Under Deng Xiaoping, this tension was managed well in that the benefits of growth accrued faster than the tensions. Under the current leader, Xi Jinping, the opposite of a Goldilocks effect is beginning to occur. Xi Jinping is begging to recentralize political control as well as economic control, stifling the free flow of communication so necessary for a market economy to work.

Everyone has been addled by the growth but the balancing act is becoming increasingly precarious. As Stephen Green notes,

One party rule can’t afford a lot of transparency, but a modern economy demands it.

Ben Rhodes journalists are nattering about the trade war, not addressing the morass underneath.

Daniel Shane addresses some of these deeper issues in Forget the trade war, China's economy has other big problems.

The Chinese economy expanded rapidly in the years after the global financial crisis thanks to repeated debt binges.

"China's growth has been highly credit intensive," said Gerard Burg, Sydney-based senior economist at National Australia Bank. The total amount of debt in the Chinese financial system is now several times the size of the entire economy.

Some of this money has gone into building bridges, road and other infrastructure. But a lot has ended up in less productive parts of the economy, such as big, inefficient state-run companies. The more dynamic private sector hasn't benefited as much.

Late last year, Beijing stepped up its efforts to rein in the high levels of debt, which is one of the main reasons the economy is now losing momentum.

Some analysts are skeptical about the Chinese government's commitment to cleaning up its financial system, especially as the slowdown deepens and the trade war intensifies.

Many provincial governments and state-run firms would struggle to stay above water without regular injections of cheap credit, according to Kevin Lai, an economist at investment bank Daiwa Capital Markets.

Cutting off their credit lines "would have very negative repercussions, like social unrest, layoffs and bankruptcies," Lai said. That's a scenario Beijing wants to avoid.

An aging population, a baby-bust, a population accustomed to 10% growth each year, a misallocation of capital on a massive scale, a rickety system of national accounts which hides debts, an increasing need for transparency at odds with the needs of national control - the list of challenges is lengthy. And, oh, yes, a trade war and rising regional tensions as everyone becomes concerned bout China's new strength.

Nothing is a foregone conclusion. The Chinese Communist Party has many exceptionally bright members. But we are getting close to a possible inflection point.

Chinese officials have turned to tax cuts, infrastructure spending and looser monetary policy as they seek to prop up growth. But some experts think these are the wrong prescriptions for the country's economic woes.

"China's problems are chronic, not acute," said Derek Scissors, a China expert at the American Enterprise Institute, a Washington-based think tank.

[snip]

"Old, indebted economies don't grow," he said.

China's problems are chronic, not acute - well, maybe. But as Ernest Hemingway said about going bankrupt. It happens "two ways. Gradually, then suddenly."

One of the great, great developments of the modern era, after double-entry bookkeeping and global trade has been the development of deep bond markets. Since the end of World War II, virtually all governments, authoritarian and democracies, have sought to turbocharge growth through debt. But as Wikiquote notes,

At the beginning of the Clinton administration in the early 1990s, adviser James Carville was stunned at the power the bond market had over the government. If he came back, Carville said: I used to think if there was reincarnation, I wanted to come back as the president or the pope or a .400 baseball hitter. But now I want to come back as the bond market. You can intimidate everybody.

And bond markets are neurotic and highly attuned to the smallest shifts in information. That is why things can happen gradually, and then suddenly. The more government try to fund current consumption through future obligations, the deeper the hole and the more dependent we are on trust. Once trust is gone, it is hard to earn back.

It all works on trust, and governments with misallocated capital, and ideologues who seek to foster division and strife, are constant agents working to seed mistrust. The longer they go, the closer we get to moving from gradually to suddenly.

UPDATE: On the evils of national debt: The National Debt Is Coming Due, Just Like We Told You by Nick Gillespie.