Meanwhile, China has avoided the consequences that confront most emerging markets facing rapid credit expansions, including debilitating financial crises or sharp slowdowns in growth. How has China achieved this financial stability? And will it persist?

The most-discussed explanations for China’s long period of financial stability are unsatisfying upon closer examination. Many analysts argue that because China has a high savings rate or because most of its debts are internally held, a crisis is unlikely. But this ignores the fact that China’s savings are concentrated in areas of the financial system that are difficult to reallocate in the short term. And even debt held by domestic financial institutions still entails costs and difficult political compromises to restructure.

Beijing has no intention of bailing out all the debts incurred by wasteful local governments. And while the decisions of what institutions to support are in process, banks and investors must manage the financial consequences of malinvestment. Even if debt is domestically held, it cannot continue expanding relative to the size of the underlying economy without generating growing risks.

There is also no suggestion that China’s political system or more powerful administrative controls offer a sustainable defence against crisis. The equity market boom and bust in 2015, and Beijing’s failed intervention to slow the decline, highlight just how ineffective administrative diktat can be in markets with a large number of participants.

Instead, what is more important is Beijing’s long track record of intervention to shield investors from losses. The credibility of Beijing’s pattern of intervention in markets is arguably most decisive in explaining China’s financial stability despite a remarkable increase in systemic risks.

For instance, China’s informal or ‘shadow’ banking system has grown rapidly over the past five years. Beijing has no interest in standing behind high-risk, high-return financial products that channel credit in ways difficult for Chinese authorities to monitor, let alone regulate. Reducing these growing risks was a key motivation for the deleveraging campaign of the past two years.

But the credibility to intervene decisively and meaningfully is changing. Bailing out all losing investors is incompatible with financial reform.

The August 2018 protests over failing peer-to-peer lending networks in Beijing are a prime example of the potential consequences of widespread implicit guarantees. Chinese citizens showed up in thousands on regulators’ doorsteps demanding repayment of losses on risky investments bearing no government guarantees at all. But because Beijing had previously intervened to restore stability in markets, investors assumed that all they needed to do to win some level of compensation was to make enough noise in public.

There are several implications of these economic policy dilemmas for developed economies and policymaking toward China. Notably, China has not discovered an alternative pattern of credit allocation or method of managing financial risks over time. Those risks are now materialising and both credit growth and economic growth in China will be slower in the future, one way or another.

China will continue to be more preoccupied with domestic financial difficulties than with external pressure from developed economies (via trade protectionism or investment restrictions). Naturally, the former will be more pronounced when domestic and international pressures coincide. But Beijing’s policy choices will be framed first by domestic economic and financial constraints. International pressure will only shift those policy options to a limited extent.

China’s economic and financial fragility has implications for Western economies considering altering their own market-oriented policies to compete more effectively against state-led behemoths from China. China has not created a viable alternative economic model, and financial resources are being wasted on an epic scale in the mainland economy. Managing those costs is a key factor explaining China’s current slowdown and will remain a critical challenge for China’s leaders for at least the next decade. There is no clear economic or political basis to adjust policy in developed economies based on the assumption of Chinese exceptionalism.

The credibility of China’s competitive threat to market-driven Western institutions will fade over time. But in the interim the debate in Western capitals about confronting China’s commercial practices will remain intense. The export of China’s financial overcapacity is a real threat to a level playing field in competitive global commerce, and Western countries are likely to diagnose both the problems and solutions differently. This will make policy alignment and coordination among like-minded nations increasingly challenging.

Logan Wright is a Director at Rhodium Group and leads the firm’s China Markets Research work.