A man walks past an electronic stock indicator of a securities firm in Tokyo. © AP Photo/Shizuo Kambayashi

This August will not be remembered kindly in China. As trading on the Shanghai exchange opened on Monday, the slide that the government had struggled to contain for more than a month resumed with a vengeance. By Tuesday, Shanghai had fallen below its pre-bubble level, erasing the gains of the last 12 months.

This time, New York, Tokyo and London’s markets also caught a cold, but the real panic was felt in emerging markets, with currencies and stock markets tumbling across Asia. In Latin America, where China figures as the largest trading partner in many economies, stocks and currencies in Brazil. Argentina, Chile, Colombia and Mexico weakened. (Brazil’s currency has lost 27 per cent of its value this year, and the economy has contracted by 2 per cent.)

There was little sign of intervention from Beijing, beyond the existing practice of suspending trading when a company’s shares fell more than 10 per cent, and signalling to China’s pension funds that they should invest. Since the crisis began, between trying to stop its own stock market bubble bursting and maintaining the desired exchange rate for the RMB, the government has spent RMB 500m and has little to show for it. To add to its troubles, the catastrophic explosion in Tianjin, and the suspicion that official figures on the Chinese economy are not telling the true story have brought confidence in the leadership’s ability to make its own economic and political weather to a new low.

Around the world, stock markets and trading partners are belatedly waking up to the realities of what the government calls China’s “new normal”—growth of seven per cent. But China’s difficulty in bringing forward much needed economic reform has meant that the country may actually be experiencing a new sub-normal, of below five per cent. Growth on that scale would be the occasion for giddy celebration in London or Washington. But it’s not enough for China, where low growth risks triggering other problems in an economy burdened by debt and saddled with inefficient state owned industrial behemoths.

Some of those problems are directly related to the government’s actions in 2008/2009, the last time the Chinese economy looked over the cliff. Then, the remedy was a RMB 4 trillion ($586bn) stimulus package that allowed China to believe that it had avoided the impacts of the global financial crisis.

The world was grateful for a stimulus that propped up China’s major commodity suppliers, including Brazil and Australia. But that package, which was funnelled into state owned enterprises and local government investment vehicles, led directly to a building boom and a property bubble which, in turn, had the effect of doubling China’s debt.

In 2007, domestic, corporate and government debt was 158 per cent of GDP. By 2014, McKinsey put it at an astonishing 282 per cent of a GDP that had roughly doubled over the same period. It currently costs 15 per cent of GDP to service that debt, and these figures also reveal that much of China’s growth since 2008 has been an illusion, propped up by loans backed by inflated property values. If this is beginning to sound familiar, it is perhaps because this looks like sub-prime, with Chinese characteristics.

Such a situation does not necessarily become a crisis: even these high levels of debt can be tolerable while the party continues. But many large enterprises, as well as private individuals, will struggle to service their loans as the good times vanish into history. Given the potential for the situation to deteriorate, much depends on China’s overall economic performance. The publication of disappointing economic figures for July, coupled with the widely held suspicion that China’s official statistics tend to reflect desire rather than reality, has spooked global markets that have been, perhaps, a little too credulous about the Chinese “miracle” in the past.

Equally noteworthy is the fact that these problems are built into a system that has yet to be reformed: China has bailed out its insolvent banks three times in the past 20 years. Now it risks having to bail out insolvent local governments, too. The government’s dilemma today is more complex than in 2008: the high investment, high export model is moribund and transition to the new, higher value, more efficient model is urgent. A further stimulus package would work against that ambition, despite some hasty announcements of new infrastructure projects. A whole system of crony lending, excessive privilege and featherbedding of monopolistic state-owned enterprises needs to be dismantled. Things will not be so simple this time around.

Last week, state media published an article complaining about extraordinary resistance to reform. In China, as ever, it all comes back to politics.