China was meant to have embraced free market reform. Alamy When in trouble, shoot the messenger.

This time-honored approach to dealing with unwelcome news was much in evidence in China this week when nearly 200 people were rounded up and criminally charged with spreading "false" rumors about the stock market and the economy, or otherwise profiting from their travails.

Without growth, the Communist Party loses its political legitimacy, yet the old growth model is broken, and to achieve a new one, the authorities must cede the very power and influence that sustains them.

One luckless financial journalist was ritually paraded on state TV, tearfully confessing his "crimes." Meanwhile, the head of the Chinese desk of one London-based hedge fund group was summoned to a "meeting" with regulators, and she hasn't been heard from since.

Her Chinese husband says "she's gone on holiday." We can only hope it is not to the reindoctrination of the asbestos mines. Despite the massive progress of recent decades, old habits die hard.

China was meant to have embraced free-market reform, yet these latest actions suggest an altogether different approach. Roughly summarized, it amounts to: "Reform good, but woe betide the free market if it doesn't do what the high command wants it to."

When the stock market was going up, the Chinese authorities were perfectly happy to tolerate what to virtually all Western observers looked like a dangerously speculative bubble, vaingloriously believing it to be a fair reflection of the wondrous successes of the Chinese economy.

The first rule of stock market investment — that share prices can go down as well as up — seems to have been almost wholly forgotten in the scramble for instant riches. When, inevitably, the stock market crashed, the authorities threw the kitchen sink at the problem, but they failed to halt the carnage.

This was an even ruder awakening – for it demonstrated to an already disillusioned public that policymakers were no longer in control of events.

A shareholder gestures in front of an electronic stock board at a stock market in Wuhan, Hubei province, August 7, 2006. China's shares extended morning losses to end 1.45 percent lower on Monday, as poor demand for Air China's initial public offer in Shanghai weighed on the market. Reuters/Stringer Perhaps they hadn't noticed, but there are today more Chinese with stock-trading accounts (some 90 million) than there are members of the Communist Party ("just" 80 million). In any case, powerless before the storm, the authorities have instead turned to scapegoating.

Apparently more liberal, advanced economies, it ought to be said, are by no means averse to this kind of behavior either.

A few years back, Italian prosecutors charged nine employees of Standard & Poor's and Fitch Rating with market abuse for daring to downgrade Italy's credit rating, while it is still commonplace in France to blame Anglo-Saxon speculators and their cronies in the London press for any financial or economic setback.

Nor are Western governments and central bankers averse to a little market manipulation when it suits them. What is "quantitative easing" other than money printing to prop up asset prices, including stocks and shares?

Chinese refusal to accept the judgments of "Mr Market," it might be argued, is just a more extreme version of the same thing. Small wonder that European officials sometimes look longingly across at the state-directed capitalism practiced in China, and pronounce it a model we might perhaps aspire to ourselves.

As recent events have demonstrated, we should not. China's stock market crash is not the work of malicious financial journalists and short-selling hedge funds but a signal of difficult time ahead and perhaps even of an economic road-crash to come.

An employee walks towards a pump jack at a PetroChina plant in Shanshan county of Hami, Xinjiang Uigur Autonomous Region July 24, 2008. China's inflation is in danger of worsening and the government should liberalise pricing of oil and power to reduce the risks, the country's parliament said in a report published on Wednesday. REUTERS/Stringer After nearly 35 years of spectacular progress, the Chinese economy faces multiple challenges on many fronts that will not be solved by denying harsh realities and imprisoning journalists.

The progress of recent decades belies an industrial sector that in truth has become quite seriously uncompetitive by international standards.

Many of China's factories need complete retooling to keep up with developments in robotics and other forms of mechanization. Yet if industry is to get less labor intensive, this only further steepens the challenge of employment creation.

It is reckoned that China needs to create some 20 million jobs a year just to keep pace with employment demand as the population shifts from land to town, 8 million of them in high-end professions to cater for the country's burgeoning output of graduates. China's modernization has created a monster that it is struggling to feed.

As the export-growth story waned, China compensated by unleashing a massive investment boom, which internal demand is now struggling to keep up with, rendering many of the country's shiny new constructs uneconomic and overburdened with bad debts.

The Chinese leadership looks to growth in consumption and service industries to plug the gap, but these new sources of demand can't do so without further free-market reform, which in turn requires further loosening of the shackles of political control.

Without growth, the Communist Party loses its political legitimacy, yet the old growth model is broken, and to achieve a new one, the authorities must cede the very power and influence that sustains them. Rumor-mongering journalists and short-selling speculators can only be blamed for so long.

This article was written by Jeremy Warner from The Daily Telegraph and was legally licensed through the NewsCred publisher network.