This December, China reaches a milestone more important by far than the Beijing Olympics. It will be 30 years since Deng Xiaoping set China on the course of “reform and opening up”, effectively ditching the Maoist dogmas that had turned the hopes vested in the 1949 revolution into tragedy for tens of millions and unnecessary poverty for the great mass of China’s people.

Time, then, to take stock - and it risks being awkwardly timed. China’s economy has expanded tenfold over this 30-year span, but it will be undeniable by December that the going is getting tougher. After a decade of double-digit growth that most Chinese under 40 think of as normal, momentum has slowed - from 11.8 per cent in the past two years, to an expected 9.8 per cent for 2008 and 8 to 9 per cent in 2009.

To outsiders, 8 per cent still looks awe-inspiring - and a success for the People’s Bank of China’s fight against overheating. Inside China, even 9.8 per cent feels less like cool air than a spell in the freezer. The situation is complicated by inflation, a neuralgic political issue. The official CPI inflation index has cooled thanks to falling food prices, from 8.7 per cent in February to 6.3 per cent in July. However, inflation as most Chinese experience it is far higher and is reflected in social unrest and inflation-busting pay rises in key coastal export industries. It would be higher still had the Government not clamped price controls on grain, coal and utilities (exacerbating electricity shortages) and blown 1.2 per cent of GDP on fuel subsidies, more than double central government spending on education.

Add to these concerns massive industrial overcapacity, and the urgency of tackling environmental degradation, and Liu Xiang, the Chinese hurdler whose injured Achilles tendon forced him to pull out of the Games, may be a more apt symbol of China’s present condition than the 51 other athletes who took it to the top of the gold medal league.

Being the world’s factory is China’s boast, and its problem. Taking imports and exports together, China’s National Bureau of Statistics reckons that 60 per cent of its economy relies on foreign trade, and the terms of trade have deteriorated, trapping exporters in a severe profit squeeze. Excess capacity in shrinking markets prevents them passing on sharply higher input costs. Again, no one outside China would term this year’s 10 per cent fall in its trade surplus a disaster. Indeed, given the size of China’s surpluses and the political tensions they generate, not least in election-year America, it could be seen as a timely “rebalancing”.

Still, China is not used to rebalancing; and it hurts. The sag in the US housing market, for example, hits China’s $80 billion (£43 billion) furniture industry hard: America buys 40 per cent of its $23 billion of exports. In Zhejiang’s low-end manufacturing hub, the local trade commission says 10,700 enterprises, a fifth of the total, have lost money so far this year. In Guangdong, where Deng’s revolution began, the Federation of Hong Kong Industry says a tenth of the province’s 70,000 Hong Kong-owned factories will close by December. Guangdong produces 30 per cent of China’s exports.

Despite mass layoffs, which hit remittances to poor rural families, domestic consumption is rising, but Rio Tinto earned the rubric of Rosy Tinto last week for declaring that demand in cities of China’s interior would take up the export slack. Most Chinese remain almost excessively frugal. We British consume more than do 1.3 billion Chinese.

Wang Zixian, policy researcher at the Ministry of Commerce, frets that China is vulnerable to a version of the 1997-98 Asian financial crisis. His forebodings may seem farfetched, given China’s $1,800 billion reserves. Ordinary Chinese who uttered them would land in jail for scaremongering. Yet remember the sources of that crisis: inflows of hot money; state interference in bank lending and accompanying favouritism, corruption and resource misallocation and, finally, property bubbles. China suffers all these ills - and danger signs abound. The Shanghai exchange has fallen 60 per cent this year; a third of Beijing’s downtown office space is vacant and only a dozen of the 1,500 spaces in Dongguan’s South China Mall are filled. Not all “growth” is growth. Nonperforming loans, officially $600 billion, could be as high as $1,100 billion - either at, or well above, the fifth of GDP that, in Japan, triggered a decade’s slump.

On July 25, the Politburo abruptly altered course. Controlling inflation no longer comes first. The new slogan is: “Fast yet steady growth for a long time to come.” Li Keqiang, the vice-premier, is reportedly devising a 370 billion yuan ($54 billion) stimulus package. Bank lending targets, which are centrally set, have been eased.

Why would Beijing want to “stimulate” the economy when overcapacity is acknowledged as “a deep-seated problem”; when the infrastructure, despite hefty investment, is creaking; and when real lending rates are negative and so, importantly, is the interest on bank deposits where most Chinese save?

Politics, is the answer. “Stability, stupid” is the card on every cadre’s wall; the instinct is to go for growth and hang the consequences. But these could be grave. China needs to move on from cheap energy and labour and zero attention to the environment, moving up the value-added curve. That, Mr Li said last month, will require “innovation” and a freer “market system”. In 1998 China’s then premier, Zhu Rongji, responded to crisis by closing loss-making state enterprises - breaking Mao’s “iron rice bowl” and throwing millions out of work. China’s present leaders need to be equally bold - ditching distorting price controls and putting more disposable income in people’s pockets by investing heavily in health, education and pensions. Deng might have done that. But Deng is dead.

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