China's economy is slowing and that is a big worry for Australia and New Zealand.

Though it may seem less dramatic than the financial train wrecks we have seen in the US and UK in the past four years, what we are seeing is no less historic.

Australia and New Zealand are now far more directly linked to the Chinese economy than to Europe - and in particular to the fluctuations in demand for commodities it drives.

On Tuesday, China reported trade data showing import demand falling faster than anyone had expected.


That was followed yesterday with news that second quarter GDP grew at 7.6 per cent - still outrageously high by Western economic standards but the lowest China has seen for more than three years.

The annualised growth rate has been dropping steadily quarter by quarter since late 2010 - 9.8 per cent, 9.7 per cent, 9.5 per cent, 8.9 per cent, 8.1 per cent and now 7.6 per cent.

The trend is clear and while that has been driven to a large extent by Chinese Government efforts to prevent a bubble it is by no means clear that the dragon economy has hit bottom.

Using the kind of regulatory measures Alan Bollard can only dream of, the Chinese state targeted a slower growth rate of 8 per cent in 2011. It didn't quite get there so it kept the brakes on and targeted 7.5 per cent this year. The trouble is that with the turmoil in Europe and the ongoing malaise in the US, China now seems to be hitting its target too easily and there is real fear that it is going to overshoot and have its own hard landing.

While we are still talking about a deceleration of growth rather than recession, China is such a big importer of raw materials, such as minerals and food, that it has a disproportionate impact on global prices.

China is now Australia's largest trading partner. Australia is our largest trading partner and China is our second largest.

It's easy to forget just how fortunate we have been to have such strong ties to China.

Both Australia and New Zealand have been at risk of taking China's near 10 per cent growth for granted.

The China boom drove dairy prices to historic highs and underpinned tourist growth with good numbers - both directly from China and also from the buoyant Australian market while growth from the US and Europe has flagged.

Despite that New Zealand's economy has been muddling along with a tenuous 1-2 per cent GDP growth.

If Chinese growth comes off sharply now, then where will New Zealand's growth come from in the forseeable future?

So in this part of the world what we really need is for China to keep booming along at 9 or 10 per cent growth for a few more years - at least until the US and Europe have had time to get their act together (or, God forbid, we do).

There is no doubt that if the Chinese Government wills it the country could keep the boom going for several years yet.

The Communist Party has an almost unimaginable capacity to stimulate its economy.

Its leaders could unleash trillions of US dollars of cash or gold reserves.

They also have far more capacity than the West to free up money by dropping interest rates - the official cash rate is still a hefty5 per cent in China.

But for the past decade the West has been delivering a pretty good demonstration of what not to do with an economy.

China has been watching and learning.

Unleashing large-scale stimulus shifts problems into the future and also runs the risk of creating market bubbles which can be very hard to control when they go pop.

So don't expect to see Beijing unleash panicked measures. China's leaders can afford to play a long game that their Western counterparts cannot.

That's in part because they don't have to worry about opinion polls or impending elections and in part because they can quite literally afford to.

Where Western democracies are up to their necks in debt the Chinese have more than US$3 trillion in cash reserves.

We may see some response to this week's events.

The world is waiting and worrying and hoping that Premier Wen Jiabao will do something to turn around his super tanker economy before it starts to add to the global economic downturn. How much we see and when we see it will depend as much on politics and economics.

Just as we are watching history unfold in Europe, so too we are watching something fascinating and unprecedented in China as the state attempts to exert control on a market economy in a way that no Western Government has ever managed.

It is going to be one hell of a scrap. And whether we like it or not, we're in the thick of this one.