Over the past few years, China has pursued an aggressive policy of increasing its gross domestic product at all costs. This has led to what some pundits have hailed as an “economic miracle” of growth in China as it moves toward a capitalist free market model.

But the reality behind China’s rapid growth is anything but miraculous. Beginning in the late ‘90s, in order to foster growth, the Chinese government made capital available at zero cost and instituted lenient tax laws, which touched off a torrent of spending. In addition, these policies encouraged local municipalities to build factories and other facilities simply to reap the benefits of that growth and to create jobs for citizens.

The result has been a build-out of manufacturing capacity for which there is no genuine need. That in turn sparked fierce competition, which has pushed prices down by as much as 50 percent during the last three years.

The losses have been huge in steel, automobiles, cement, and manufacturing, just to name a few. According to the October report from the National Bureau of Statistics, which covers 200,000 Chinese companies, more than $15 billion was lost in the first seven months of 2005 alone, which represents a 55 percent increase over 2004. Such a hemorrhage of cash is unsustainable, even for China.

According to the November 2005 report from Simon Hunt Strategic Services, the Chinese leadership is now waking up to this dream-turned-nightmare and realizing that its inflated economy could collapse if something isn’t done to control it.

In a series of closed-door meetings, Chinese officials met last fall to work out an economic model for keeping the Chinese economy going while stemming the tide of losses. The new policy, simply put, is to allow only the type of growth that adds value to the economy. An element of this plan is to smooth the sharp divide between the wealthy urban population and the extreme poverty of rural areas.

To begin with, many banks are being privatized and will have to make a profit. That means lending by the traditional rules of commercial banking. In addition, banks will be forbidden from lending in certain sectors where there’s already too much growth. Investment in such fixed assets will be significantly curtailed. This in turn will slow construction, which will put the brakes on...