Even some of China’s deepest skeptics have been wowed.

Suddenly the world’s second-biggest economy is chalking up 6.7% growth again. The annualized pace in the first quarter of this year was enough to stop a few bears dead in their tracks as markets rallied.

Yet by now, we should know not to be too surprised by Chinese surprises. Making sense of its economy is a foreboding task.

A complex country with unreliable data and contradictory trends, the number of moving parts bewilders: the over-reliance on exports, the wildly gyrating stock market and – most worrying of all for a world still suffering bouts of post-traumatic stress from the 2008 global financial crisis – its rapidly ballooning debt levels.

But take a step back, and the magic behind China’s rebound looks a little more predictable. The People’s Bank of China shoveled around a trillion dollars of credit into the economy in the first quarter. And it repeatedly cut interest rates over the past year in an attempt to stimulate further borrowing.

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Intense Scrutiny

The credit stimulus has pumped China’s debt levels to 280% of gross domestic product, a multiple of every other emerging market, according to data from Moody’s. Recent research from Macquarie Bank states that China’s total leverage is now in excess of US$ 35 trillion.

Much of this debt is concentrated in companies and local government (it’s often hard to distinguish between the two, with so many firms owned by the state.)

Construction companies, heavy industry and utilities have only managed to cover their existing debt by borrowing heavily – as opposed to expanding revenue. Real growth remains hampered by a huge oversupply in these sectors, with too many firms chasing too few viable projects.

Much is at stake. An economy faltering, or worse, bodes danger for the ruling elite, whose authority could come under scrutiny like never before.

Moral Hazard

At the same time, the government recognizes the need to deleverage the economy. And given the debt mountain isn’t about to get paid off, there has to be another solution.

Credit expansion is now, finally, beginning to slow. But that won’t solve the more immediate problem for those state-owned enterprises that are heavily indebted and performing poorly. Many would struggle to repay creditors.

Will the government let them go bust in a shift toward free market orthodoxy? Of course not. While this would make the economy more efficient in the long run, it would unleash mass unemployment and subsequent social discontent.

China’s current solution is to pretend the problem doesn’t exist. Bad debt is probably equivalent to around 10-15% of banks’ loan books. But officially, the ratios are at soothingly normal levels.

This charade depends on a fast-growing economy. It would be brutally exposed by a sharp slowdown.

China’s “market socialism” model makes continued government intervention inevitable. The state has the power to act decisively to aid the economy and there is widespread confidence it will do so – despite the moral hazard this represents. There’s a fundamental expectation that the government will always bail out state owned enterprises.

But to make the debt pile sustainable for the longer term, the government has to come up with a more convincing solution. It needs to make the debt disappear.

One method being actively considered is allowing the major banks to convert their bad debt into equity – giving them large stakes in major companies.

The government pulled off a similar feat in 1999. It successfully wrote off a large swathe of bad debt using government bonds.

In 2016, however, China’s financial system is infinitely more complex. The multitude of shadow banking and other opaque financial instruments would make it make it far harder to pull off the same trick.

While such financial engineering might well work in the short term, it’s likely simply to push the risk elsewhere. And this time around, the whole world will be watching, waiting and judging.

Yet China has a history of defying western critics of its economic policies – as is proven by three decades of spectacular growth. And it has something further up its sleeve: the Silk Belt and Road initiative.

This cornerstone of Chinese foreign policy could have important economic overtones. The plan is to develop vastly ambitious infrastructure projects across Western China and Eurasia.

The initiative will act as a giant contract and job-creation machine for the many Chinese construction firms faced with falling demand and tough competition at home.

For the rest of us, it’s part of the moral haze that China has become.

Merlin Linehan has worked in development finance within Eastern Europe and Asia, and spends much of his time investigating the risks and opportunities that are created from the ongoing expansion of Chinese businesses that invest overseas in emerging markets.