Great Wall of China © Photodisc-SuperStock // Great Wall of China © Photodisc-SuperStock

OK, I know the news that China's economy grew at a slower-than-expected 7.7% rate in the first quarter -- combined with worries about a deepening recession in much of the eurozone and a U.S. economy that might itself be slowing -- knocked the stuffing out of stocks on Monday. And that the China news looks like it broke the momentum of the recent rally, at least for now.

Believe me, I'm not fond of drops of this magnitude.

But . . .

In the slightly longer term, I think this slowing in China's growth rate is good news. You see, I think it's intentional (which means a return of fears about an unintentional hard landing aren't justified).

China's government is trying to slow its growth rate because it's afraid of setting off another bout of real estate speculation, of increasing the flow of hot money into China's economy and of the rising tide of Chinese borrowing and debt, especially at the local level.

Investors around the world who decided they could count on China revving up its economy again to 9% or 10% growth were indeed disappointed. They'd placed their bets, especially in the commodities sector, based on those expectations. And when those expectations weren't met, they sold and sold. 

But the only way China could meet those expectations is to go back to the old days of stimulus, stimulus, stimulus, based on massive spending on infrastructure and other hard assets and financed by loans that stood almost no chance of being repaid.

China faces a choice -- a slowdown today or a crash tomorrow. And I think China's new leaders have picked "slowdown."

Consider the alternative

Now, like most medicine, this one isn't the tastiest thing to swallow. It means global expectations will have to be reset in sectors from metals to luxury goods to fried chicken. China's decision to go slower isn't going to make everyone inside China happy, either, even if it is accompanied by a rebalancing that points more of China's growth toward the country's consumers.

But considering the alternative -- a possible developing-economy bust fueled by cash from global central banks -- I think this is a medicine that should be swallowed.

I'm going to quickly lay out the case that this slowdown in China is intentional, and suggest three ways it changes the investing landscape.

In China it's not just what is said, but who says it. So, when earlier this week Zhang Ke warned that local government debt was out of control, it was a big deal.

Zhang Ke isn't some minor official in the ministry of something in Beijing. Zhang founded and heads ShineWing, China's largest Chinese-owned accounting company. He's been vice chairman of the Chinese Institute of Certified Public Accountants since 2004, and in 2005 he was voted one of the country's top 20 accountants by China's Ministry of Finance. He's taken ShineWing to Hong Kong, Singapore and Australia -- and, quite frankly, you don't get to be the flag bearer for China in the international markets without a nod from Beijing.

image: Jim Jubak

Jim Jubak

Zhang's warning comes on the heels of a downgrade of China's credit rating from Fitch Ratings. And on Tuesday, Moody's Investors Service cut its outlook -- not its rating -- from positive to stable. The Chinese government's knee-jerk reaction to criticism like this from outside organizations is usually to circle the wagons, deny the existence of a problem and blacken the name and motives of these critics.

This time, however, Zhang piled on. Local government debt is "out of control," he said, according to the Financial Times. ShineWing had all but stopped signing off on bond sales by local governments.

"We audited some local government bond issues and found them very dangerous." Zhang added. "Most don't have strong debt-servicing abilities. Things could become very serious."

And, he said, "A crisis is possible, but since the debt is being rolled over and is long term, the timing of its explosion is uncertain."

Add in recent steps by the People's Bank and the Beijing government to rein in real estate speculation by raising taxes on profits, as well as efforts by the central bank to withdraw liquidity from the economy to offset inflows of money from overseas, and you've got a government that seems determined to live up to its rhetoric: These are the actions of a government that believes the days of double-digit economic growth are over.

A changed investment landscape

I'd suggest three ways an intention to live with 7% to 8% growth changes the investing landscape.

First, not everyone who has some claim to a share of the pie as it has been divided is on board. In fact, I see signs that this stance by China's top leaders has set off a scramble among the politically connected to grab for economic advantage. If the pie is going to grow more slowly, these members of the country's elite are going to try to get a bigger share of it.

This is the common thread, to my mind, that connects such seemingly random events as the attack on Apple (AAPL) -- orchestrated by the official China Central Television that claimed the company offered skimpier warranties in China than elsewhere in the world -- and efforts by China's big telecom operators to either slow the growth of Tencent Holdings' (TCEHY) WeChat mobile phone application, or to grab a slice of the revenue by forcing Tencent to pay for the bandwidth that its 300 million subscribers use.

Politically connected state enterprises -- and no companies in China are more politically connected than China's state-owned China Mobile (CHL), China Unicom (CHU) and China Telecom (CHA) -- have a long tradition of using their connections to reorganize the economic playing field to their advantage.

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The preliminary evidence points to an increase in this kind of political jockeying that will make it even harder for investors to figure out what any stock is worth in China. How do you factor in the possibility that a state-owned enterprise will grab a hunk of the revenue of the business you've invested in?

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