Things are happening so quickly that foreign pundits often diagnose solved problems

Changes are usually fast in China. So more often than not, while outside columnists are discussing one set of issues, the country has already moved on to experience a different set. People familiar with the country's economic reform have seen this since the 1980s.

When Paul Krugman, in his recent column, discussed China possibly stumbling, he said the country faces a tricky transition because a reasonable strategy would have been to buy time with credit expansion and infrastructure spending while reforming the economy in ways that put more purchasing power into families' hands.

"Unfortunately," he says, "China pursued only the first half of that strategy, buying time and then squandering it."

As a result, there has been a rapid increase in debt, much of it owned to the poorly regulated "shadow banks", and a threat of financial meltdown.

The first half of Krugman's diagnosis is good, but the second half is no longer the case. China has, since the 2008 global financial crisis, spent a lot of money to buy time, but it hasn't used it well to promote the kind of transition it wants. But the threat to the country's financial health no longer comes from "shadow banks".

The shadow banking business grew into a large business mainly because local governments wanted to borrow for projects that regular banks and anyone with a sense of financial prudence would think too risky. So the real threat to the economy is not debt per se but local government's ambition for grand projects and grandstanding.

The country is no longer plagued by that mentality, thanks to President Xi Jinping's iron fist in his anti-corruption campaign launched more than three years ago.

Some officials responsible for wasteful projects in the past are being investigated for corruption - most commonly for embezzling public funds or signing contracts with their personal friends. There is no incentive for other officials to follow their career path.

In terms of regulation, China has been very effective, if not pitiless, in disciplining individual officials for their behavior in the use of public funds in the past three years.

Nonetheless, wasting less isn't equal to creating more. Stopping local governments from borrowing for unworthy projects can't lead them to realizing what they should do.

It is an entirely new game to organize production not for the export market but for domestic consumers.

China's problem of debt, incurred mainly from the process of encouraging the same industries to produce for the same customers after the 2008 global financial crisis, and its admitted inadequate experience in managing its financial market, is only secondary to the change that is still unfolding in the global business environment.

As consumers in North America and Western Europe are no longer spending as much, a rapid rise in wages also prevents China from earning as much as before, in terms of per unit of product.

At the moment, the most crucial thing to do, therefore, is not to conquer shadow banking, or to control the size of government debt.

Nor is the difficulty just about making the local governments shed their debt burden.

The central government's debt-swap program, started last year, does help diversify the risk, although in a limited way. The problem, after all, has not been so critical as to force local governments to sell off their luxury office buildings.

An additional part of their debt burden can be shifted to the private sector, if the idea of public-private partnerships really gets off the ground.

The real challenge is a political one, namely how to make the local governments support, or at least make way for, the changes that Beijing is seeking. The best thing that an administration-led government can do is investment - channeling a huge amount of public funds to public projects that are meaningful for long-term development. It is not to design and to sell new consumer goods and services.

Continuing investment in all kinds of public infrastructure, from public transit to underground tunnels, is the easiest game to play.

For the central government, some large-scale restructuring and replenishing of the social security networks, from retirement benefits to medical care, would make a lot of sense.

How much China's local governments can do in this direction in 2016 is still not known. But luckily, they don't seem to have other choices. The disciplinary restrictions from the anti-corruption campaign won't allow them to pursue their old ambitions, or to just sit in their office doing nothing.

The author is editor-at-large of China Daily. Contact the writer at edzhang@chinadaily.com.cn

(China Daily European Weekly 01/15/2016 page12)