Built on coal: Liangshuijing Coal Mine, Shenmu County. Credit:Sanghee Liu For Shenmu investors, who are chasing embezzled funds upwards of Yuan20 billion in a country without an effective consumer or corporate regulator, there seems precious little left to salvage. The cranes across the Kuyu River have slowed to a crawl, as officials and their favoured developers abandon dreams of building an entire new city. The nation's most generous public health and education programs, which Shenmu once enjoyed, have all been halted. The county Communist Party chief has been removed from his post. In a moment of fleeting fame, the nation was entertained by a local bank deputy - dubbed "Sister House" - who explained in court that accumulating 40 Beijing properties under various names was a relatively normal thing to do in some parts of the country. "I wake up in the middle of the night, my hair has gone all grey," says Wang. This week, in Canberra, it was Treasurer Joe Hockey looking decidedly grey, as he fought with his Prime Minister and the Senate to inject some budget rectitude before the full force of China's construction slowdown hits. Prime Minister Tony Abbott - who came to power with relentless attacks on the Rudd and Gillard government's failure to balance the budget - told reporters that the end of history's greatest resources boom was really just a short term blip. "I accept the terms of trade are declining but these are cyclical factors, they are not structural factors," he said.

Shenmu has become a ghost town. Credit:Sanghee Liu Those who watch the internal dynamics of the Chinese economy more closely, however, sense a severe case of denial. In the short run, says Dong Tao, chief economist for the Asia region at Credit Suisse investment bank, President Xi Jinping's anti-corruption campaign and the parlous state of local government finances "make it impossible to continue what they've done in the last five years". And in the medium term, he says, it will be even harder. Tao says the "golden age" of endless infrastructure, housing, exports and government stimulus is over. "This is where people are too optimistic, believing that within one or two years things will be better." Ripple effect: A coal-generated power station in Shenmu County. Credit:Sanghee Liu China's transition to a services-based and consumption-driven economy means that its appetite for commodities such as Australian iron ore is going to "shrink dramatically", says Tao.

It's now well known that China's decade of hyper-industrialisation led to unprecedented prices for key Australian commodities. The most rigorous study, a recent Reserve Bank discussion paper led by Peter Downes, found the mining boom (effectively defined as China's acceleration of industrial output) delivered an extra 13 per cent in disposable income to the average Australian household for what was, in most cases, no extra effort. Shenmu's apartment buildings have become vacant. Credit:Sanghee Liu The paper shows that by 2013 the mining boom had pushed up wages (by 6 per cent), employment (3 per cent) and even population (1 per cent). It prompting a sustained housing boom across the country despite interest rates being 2 per cent higher than otherwise. It pushed up the Australian dollar and therefore massively improved purchasing power for tradeable goods which led, for example, to 30 per cent more motor vehicle sales than would otherwise have been the case. Manufacturers were hurt on exports but benefited from supplying the huge surge in mining investment, which quadrupled as a share of GDP. The biggest single beneficiary, however, was Canberra. These super corporate tax revenues were redistributed in the form of family benefits, baby bonuses and eight years of consecutive personal income tax cuts. Perhaps the Abbott Government's central political predicament is that those multi-billion dollar windfalls were much easier to give than take away. Contrary to Abbott's bold claim, plunging terms of trade have already shredded his election promise to return to a balanced budget by 2018-19. The imbroglio about whether and how to push health and education spending cuts through a hostile Senate - the "barnacle debacle" - was a minor foretaste of things to come.

This week Treasury Secretary Martin Parkinson delivered a "serious warning" about the politically-challenging reforms that will be necessary to avert a fiscal and broader economic crisis. "Unless we tackle structural reform, including fixing our fundamental budget problem, we will not be able to guarantee rising income and living standards for Australians," he said. Parkinson speaks from personal experience . The esteemed economist is about to be sacked as punishment for guiding the previous government's work in reforming the tax base with a carbon tax and emissions trading scheme. The week began with figures showing Chinese manufacturing has slumped again and the country is on track for the lowest GDP reading since 1990. China is likely to fall short of the 7.5 per cent growth target for the first time in 15 years, according to Bloomberg's consensus forecast of economists. But the Chinese GDP slowdown masks a much greater impact on the commodities prices which underwrite the Australian economy and particularly the budget. Wednesday's national accounts showed Australia has just endured an "income recession", with national income falling in the two quarters up until September. And that was before the prices of iron ore, coal and oil (which is linked to LNG pricing) really fell through the floor, reaching new lows this week. These latest negative surprises have pushed the Reserve Bank to consider lowering interest rates at its next board meeting in February, according to a report by The Age economics editor Peter Martin. But the bank, like everybody else, is groping in the dark for clues on how China's notoriously complex and opaque political-economy will evolve from here. To this end, the bank has invited one of China's foremost economists, Yu Yongding, to spend a month in its Martin Place headquarters with the team of nine specialist China watchers that it has been nurturing since the Global Financial Crisis. Professor Yu, formerly a member of the monetary policy committee of the People's Bank of China, says the slowdown in GDP growth is a "necessary cost" of transitioning from resource-intensive construction towards a more sustainable growth and economic model based on services and consumption.

"The good news is that the real estate bubble has been contained," says Yu, noting that China's addiction to real estate construction was more extreme than any significant nation in history, with the possible exception of Spain before the bursting of its bubble. "China is still a poor country in per capita terms and yet home ownership has surpassed 90 per cent. There are so many luxury hotels, skyscrapers and magnificent government buildings - I call it madness." The bad news, says Yu, is that China will also need to embark on broad and bold reforms if it is to make the transition to sustainable growth. China's most pressing economic problem is the most rapid accumulation of debt that any country has ever known. Standard Chartered calculations show that China's debt to GDP ratio has surged from 150 to 250 per cent in just five years. In other words, in the absence of reform, China is stuck in a savage debt-spiral where ever-increasing volumes of credit are producing diminishing returns. Last month one of the United State's most respected economic institutions, The Conference Board, released a major report that projected China's trend growth rate to fall to 5.5 per cent for the remainder of this decade, and 3.5 per cent through to 2025, unless major reforms are enacted to provide space and necessary institutions for consumers and non-state-backed investors to thrive. It's a far cry from projections of 8 per cent endless growth which were common until the difficulties of this year. "The observable reality is things are not going in a more marketised or liberalised direction," says the director of the Conference Board's China Centre, David Hoffman, listing recent crackdowns on information flows and policy debates, campaigns against Western corporations, and an apparent de-institutionalisation of top policy processes as indicators of "anti-reform".

Hoffman says that, longer term, the Chinese Communist Party is likely to choose liberalising reform but only after exhausting all other options. "'Kicking the can' is a proverb in every country," he says. It turns out that structural reform is hard in every country. And all the more so in political systems where unsuccessful leaders risk losing far more than just their jobs. "The politics are very important behind the scene," says Yu, the renowned economist currently assisting the Reserve Bank. "If the country is politically very stable then people are tolerant to mistakes made by leadership. But if politically you are not that strong then you tend to solve short term problems and leave those structural problems to your successors to deal with. The psychology is 'not now, you have to wait till next year, and next year you think maybe the next year'." Yu, like Hoffman, thinks it likely that the Xi Jinping administration will ultimately choose to tackle the country's economic structural problems, if only because there is no other viable choice. "Passing the parcel, passing the grenade - this government is unlucky because the grenade is in their hands and there is no one to pass it to in the next five years," says Yu.

Yu says Chinese authorities have not yet begun to create the kinds of institutions that are required for efficient markets to be sustained. And nor have they shown any willingness to let growth fall very far. "Five per cent could mean the debt-to-GDP ratio blowing out of control, capital flight, and even social upheaval," he says. The result of this intolerance for slow growth is that Beijing will continue to flirt with policies that enable the construction of even more buildings that nobody wants. This will put a floor under the short term price of Australian commodities and make the future more precarious. "You have to rally morale so people understand and give their support and then say 'lets tighten our belts'," says Yu, providing a lesson in public policy making that could apply equally in Australia. "But we haven't reached this stage yet. I think Xi Jinping is trying to consolidate his leadership and form consensus and then can carry out some dramatic reforms. You have to prepare before going to war." In recent weeks there have been some more encouraging reform-oriented signs, including an ambitious free trade agreement with Australia. Whether Xi, or Abbott, are preparing for reformist wars to rescue their respective economies is open to speculation. In Shenmu, however, in the same region where President Xi's father made his name as a revolutionary in the 1930s, it seems clear that time is running out. All that remains at the epicentre of history's biggest resources boom is thousands of bankrupt families and row after row of empty multi-storey apartments and office blocks, dotted with shuttered luxury stores and expensive restaurants, bearing down on wide empty thoroughfares and a vacant city square. Here, at least, it's hard to see how the Chinese economy can continue it's extraordinary success without market and government institutions that price risk, reward effort and punish mal-investment.

Li Chunfei, a ruddy-cheeked 37-year-old taxi driver, says his faith in an inexorably-growing economy has evaporated. "Everyone is trying to sell," says Li, explaining that he had entrusted his money to a developer who absconded three months ago. Zhao Gangliang, who drives shuttle buses for state-owned coal giant Shenhua, and has lost his lifetime savings, explains: "90 per cent of people in Shenmu have been burnt one way or another". . Wang Xia, the mother-of-two who lost