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ECONOMIC DATA from China reveals that growth has slowed sharply and that deflation has set in. As China’s economy is being weighed down by both a property slump and weak factory production, many may conclude that the received wisdom over China belongs to the pessimists. Certainly, manufacturing output is at its weakest since the dark days of the global financial crisis. In the first three months of 2015, GDP grew at ‘only’ 7% year-on-year. Growth predictions suggest that this year will probably be China’s weakest in 25 years.

After three soaring decades, fears are rising that China is on the verge of an economic crash. That would be a disaster. China is the world’s second-largest economy and Asia’s pre-eminent rising power. Fortunately, however, the pessimists are missing something from their presumptive models which are not truly reflective of China today. China is not only more economically robust than they allow, it is also putting itself through a quiet (and welcome) financial revolution.

The robustness rests on several pillars. The vast bulk of China’s debts are domestic, and the government still has enough leverage to stop debtors and creditors getting into a panic.

The country has been steadily shifting the balance away from investment and towards consumption, which will help to put the economy on a more stable footing. With a boom in services, China generated over 13m new urban jobs last year, a record that makes slower growth acceptable. Given China’s huge economy, expected growth of 7% this year would boost the global economy by more than 14% (compared to 2007).

But the real reason to doubt the pessimists is China’s reforms. After more than a decade of dithering, the government is acting in three vital areas. First, in finance, it has started to loosen control over interest rates and the flow of capital across China’s borders. The cost of credit has been historically and artificially low, minimising the returns available to savers, as well as succouring inefficient state-owned firms and pushing up investment. Caps on deposit rates are becoming less relevant, thanks now to an explosion of bank-account substitutes that have attracted almost a third of household savings. The governor of China’s central bank, Zhou Xiaochuan, has said there is a ‘high probability’ of full-rate liberalisation by the end of this year.

China is also becoming more tolerant of cross-border cash flows. Slowly but surely, the yuan is becoming more flexible; international conglomerates and multinational firms are able to move revenues abroad far more easily than before. The government’s determined stance to get the IMF to recognise the yuan as a convertible currency before the end of 2015 should pave the way for bolder reforms.

The second area is fiscal. In the early 1990s, reforms gave local government bodies greater responsibility for spending, but few and limited sources of access to revenue. China’s problem of too much investment since then largely stems from those policies. Stuck with a flimsy tax base, cities have relied on sales of land to fund their operations and have engaged in reckless off-balance-sheet borrowing.

The finance ministry insists it has a plan in place to sort out this mess by 2020. Part of those plans include central government transferring funds to the provinces for social priorities, while local government agencies are being promised more in tax revenues. A pilot programme has already been launched in an attempt to clear up local-government debt. This will lay the ground for a municipal-bond market – which, despite the risks, will likely be much better than today’s opaque funding for provinces and cities.

The third area of reform is administrative. At the start of his premiership in 2013, Prime Minister Li Keqiang pledged that he would cut red tape and bureaucracy by making life easier for private companies. Since then, there has been a boom in the registration of private firms: 3.6m were created last year, almost double the number registered in the previous year.

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IN TIME, the cumulative effects of these reforms will lead to capital being allocated more efficiently. Lenders will price risks more accurately, with the most deserving firms being given funding options and savers earning decent returns. This will have the effect of slowing China’s economy down – how could it not? – but gradually and without breaking the system.

Dangers will remain. Liberalisation breeds instability. When countries ranging from Thailand to South Korea dismantled capital controls in the 1990s, their asset prices and external debts surged, which ultimately led to the then banking crises of south east Asia. China has strong defences but nonetheless its foreign borrowing is rising and its stockmarket is up by three-quarters in just six months.

How politics changes in China is also important. Whilst the economic reforms the country proposes have high-level backing, the anti-corruption campaign of President Xi Jinping means that Chinese officials live in a state of constant fear of state investigators. Many officials dare not engage in local experiments for fear of offending someone powerful.

Political reforms matter, too, because there is a pressing need to end the dire system of hukou, or household registration, which relegates some 300m people who have migrated to cities from the countryside to second-class status and hinders their ability to become empowered consumers. Similarly, farmers and ex-farmers need the right to sell their houses and land, or they will not be able to share in China’s transformation.