A worker operates machines on a photo and mirror frame assembly line at a factory in Zibo, Shandong Province. Manufacturing in China was flat in May, and non-manufacturing activity also showed a drop in May from the previous month. (Aly Song/Reuters)

A slew of recent statistics confirm that China’s growth is slowing more sharply than expected, forcing anxious policymakers to debate which levers to pull to revive the economic juggernaut and preserve the ruling Communist Party’s last major pillar of legitimacy.

Unlike in past slowdowns, Chinese officials appear far less confident about what to do this time. Facing unpalatable choices — each carrying risks — the country’s top leaders have sent out confusing signals and statements in recent days.

The crisis is coming at a perilous time here. The Communist Party is approaching a once­-in-a-decade leadership transition this year, and it is unclear whether the outgoing duo of President Hu Jintao and Prime Minister Wen Jiabao have the will or capacity to make wrenching policy changes in their final months. Social tensions also are rising. And the party is thought to be grappling with serious top-level turmoil after the ouster of prominent Politburo member Bo Xilai.

China’s problems also come as the global economy appears increasingly tenuous, with disappointing job growth in the United States, a banking and sovereign-debt crisis in the euro zone that is spreading beyond tiny Greece to much-larger Spain, and even worries in the developing world, where India is experiencing a dramatic slowdown.

Until recently, China was viewed as a bright spot in an otherwise gloomy global financial picture, along with India and Brazil — countries with continued rapid growth that could prevent the world from plunging into another recession while also signaling a shift in economic might from the West to the developing world.

Slowdown in Chinese manufacturing (The Washington Post/National Bureau of Statistics of China)

Now there is concern that the troubles in China, the world’s ­second-largest economy, might serve to deepen the global economic downturn.

Massive investment

China’s problems are complex. Simply put, the country’s recent double-digit growth in gross ­domestic product has been fueled mainly by its massive investment — spending on infrastructure, skyscrapers and factories by local, provincial and central governments. Last year, investment spending accounted for roughly half of China’s GDP, with all that construction funded by a spectacular run-up in real estate prices. It works like this: The government sells real estate to developers, and then developers and state-owned enterprises use real estate as collateral to get bank loans.

Meanwhile, domestic consumption — which fuels economic growth in the United States and most other developed countries — has remained comparatively low in China, accounting for just a third of its GDP. And exports have always been a relatively small part of ­China’s overall economy, despite the country’s reputation as an exporting powerhouse.

China, however, is reaching its saturation point in investment spending, particularly after a major burst in 2009-10 to ward off the effects of the global recession. Real estate prices are cooling, which hurts local government coffers and banks dependent on land as collateral for loans. Exports are dropping precipitously, with the falloff in demand from recession-stricken Europe and the United States. And Chinese consumers — among the world’s biggest savers — still have not taken up the slack, despite a government push in recent years to encourage spending.

But at its heart, the problem is mainly political — the Communist rulers’ continued resistance to real economic reforms that would boost consumer spending and wean the country off its addiction to investment.

Sky-high GDP growth has become almost sacrosanct here, part of the authoritarian regime’s implicit compact with its citizenry: We supply double-digit growth in exchange for you sacrificing democratic rights and freedoms. The compact has lasted more than two decades, since the Communist Party sent soldiers to massacre unarmed pro-democracy students at Beijing’s Tiananmen Square in June 1989. Since then, whenever the growth rate appeared to fall, the government has spent more to prop it up — even as that has brought problems such as inflation, overcapacity and mounting debt.

Chinese consumers have benefited from the investment-led growth in the form of infrastructure — new airports, high-speed trains and an expanded highway system. But wages have hardly kept pace, and the social safety net, or what exists of it, is spotty at best. In addition, government policy that favors borrowing by state firms has deprived households of savings-interest income. The result is a disparity: China has become rich, but many of its people remain poor.

China’s leaders have said that they recognize the need to reduce the role of investment in the economy and to boost domestic consumption. But with economic growth falling faster than expected — and the party desperate to maintain stability ahead of the leadership transition — the question is: Will the rulers once again resort to government spending, with all the concurrent problems?

“They’ve already realized the dilemma they are facing,” said Liu Yuanchun, deputy dean of the economics school at Renmin University. “The goal of restructuring the economy while maintaining growth is itself a contradiction.”

The result seems a kind of political paralysis not usually associated with a collective leadership that favors long-term decision making and strict adherence to “five-year plans.”

On the one hand, officials have insisted that there will be no new stimulus. On the other, China’s central bank has announced new rules to ease liquidity, and the main economic planning agency, the National Development and Reform Commission, has accelerated approval of hundreds of projects this year, many in the solar power and alternative energy sector.

“They’re very schizophrenic,” said Patrick Chovanec, an American who teaches finance at Tsinghua University in Beijing. Government policymakers are “stepping on the accelerator and stepping on the brake at the same time. They want the growth, but they don’t want the problems that come with the growth, the bad debt and the inflation.”

“I think they’ve painted themselves into a corner,” Chovanec said. “They have a limited number of levers; all of them come at a cost.”

He added, “What China needs is reform to produce growth, not stimulus to produce growth.”

Indicators of slowdown

There are many indicators of China’s slowdown. Manufacturing was flat last month, according to a widely used index, and non-manufacturing activity in May showed a drop from the previous month. House prices in May fell to a 16-month low. In April, foreign investment in China was down 26 percent from last year. Retail sales of consumer goods were up 14.1 percent in April year-on-year, but that marks a drop from 15.2 percent year-on-year growth in March and more than 18 percent growth year-on-year in December.

Several Chinese economists said in interviews that they expected the country’s second-quarter growth to slow to between 7.6 and 7.8 percent. The lowest estimate from a Chinese source came, surprisingly, from a government think tank, the State Information Center, which projected 7.5 percent.

Some Western economists think China’s GDP growth could drop further, to below 7 percent. With so many leading indicators pointing downward, “it’s hard to see where it’s going to come from,” said Nicholas Lardy, a senior fellow at the Peterson Institute for International Economics in Washington and author of a new book on China’s economy, referring to the GDP growth.

“I think the government will gin up a few infrastructure projects to keep the growth rate from falling too much,” Lardy said. But, he said, “they’re avoiding the kind of reforms — and they’ve been avoiding them for a long time — to get more private consumption expenditure.”

The government has taken a few steps to try to coax consumers to spend more. On June 1, the government introduced subsidies of up to $62 to help push consumer sales of energy-efficient air conditioners, flat-panel televisions and other appliances. Separately, the government revived a “cash for clunkers” program, first used during the 2009 stimulus, to help people in rural areas turn in their old cars for newer models.

But economists said those half-steps only delay the more fundamental reforms that are needed. For example, allowing interest rates to float according to the market would give consumers more incentive to invest their money in banks, giving those institutions more capital to lend. Also, the government could make consumer credit easier. And freeing capital controls, including letting foreign firms list on China’s stock market, would allow more international investment to flow in.

Such steps would require the Communist Party to do something it has rarely done: give up a modicum of control. But many see the slowdown and the leadership transition as China’s best chance to reform and modernize its economy.

“It’s one thing for Hu Jintao and Wen Jiabao to go out on a weak note,” Lardy said. “The new guys are assessing the risk of a really serious slowdown, not lasting a few months but a few years. I’m hoping that’s going to focus a few minds.”

Researcher Liu Liu in Beijing contributed to this report.