Something interesting has happened. China earlier this year responded to falling stock prices by borrowing a trillion dollars and spending it on commodities, boosting the prices of iron ore, oil, copper, etc., and giving the global economy a patina of recovery.

Nothing unusual so far. China did the same thing in response to 2008's Great Recession, and the world breathed an appreciative sigh of relief, ignoring the massive new leverage that the policy involved.

Which is why the past month has been so interesting. Instead of just accepting China's largess and blithely assuming that all was once again well, the global financial media have chosen (for perhaps the first time ever outside of a full-on crisis) to focus on the negative aspects of rising leverage. They're now anticipating trouble for China, with titles like:

China's debt problem is bigger than you think
Chinese banks grappling with 'crisis level' bad debts
CLSA Sees China Bad-Loan Epidemic With $1 Trillion of Losses
The $571 Billion Debt Wall That Points to More Defaults in China

To call thus unusual is a huge understatement. And it seems to have made a difference. Yesterday China announced a fairly radical course change:

Even China's Party Mouthpiece Is Warning About Debt

(Bloomberg) - China's leading Communist Party mouthpiece acknowledged the risks of a build-up of debt that is worrying the world and said the nation needed to face up to its nonperforming loans.

High leverage is the "original sin" that leads to risks in the foreign-exchange market, stocks, bonds, real estate and bank credit, the People's Daily said in a full-page interview with an unnamed "authoritative person" starting on page one and filling the second page on Monday.

China should put deleveraging ahead of short-term growth and drop the "fantasy" of stimulating the economy through monetary easing, the person was cited as saying. The nation needs to be proactive in dealing with rising bad loans, rather than delaying or hiding them, the report said.

"Overall, the report suggests to us that future policy easing may be more cautious and that the government may try to hasten the pace of reform," said Zhao Yang, chief China economist at Nomura Holdings Inc. in Hong Kong. Similar commentaries have had a "large impact" in the past, the analyst said in a note.

The pace of China's accumulation of debt and dwindling economic returns on each unit of credit have fueled concern that the nation is set for either a financial crisis or a Japanese-style growth slump. Strong growth in mortgage lending means that banks could be exposed to significant losses should property prices drop sharply, Fitch Ratings said in a statement dated Sunday.

"A tree cannot grow up to the sky -- high leverage will definitely lead to high risks," the person was cited as saying. "Any mishandling will lead to systemic financial risks, negative economic growth, or even have households' savings evaporate. That's deadly."

China's accumulation of debt has been the fastest of Group of 20 members over the past decade, according to Tom Orlik, an economist for Bloomberg Intelligence. Debt has climbed to 247 percent of gross domestic product, Bloomberg Intelligence estimates.

Volatility in stocks and the foreign-exchange market early this year had partly reflected the vulnerability of the financial system, the article said.

The newspaper piece touched on the topic raised by Premier Li Keqiang of banks swapping debt for equity to cut excess borrowing by Chinese firms.

While bankruptcies should generally be avoided, "zombie" companies beyond salvage should be allowed to fail because debt-to-equity swaps would be costly and self-deceiving, the commentary said.

Supply-side reform will remain the focus of economic policies for the near future, the article said. While the economy can grow sufficiently without stimulus, its performance will be "L-shaped," not a "U" or a "V," for quite some time, rather than just a year or two, the commentary said.

Traders responded to this sudden honesty by selling pretty much everything:

Metals, Mining Stocks Sink as Chinese Data Signal Weak Demand

(Bloomberg) - Industrial metals fell while mining stocks dropped the most in six weeks as a slump in Chinese copper purchases and an increase in steel exports signaled weak demand in the top user.

The decline in commodities deepened on Monday after China copper imports fell from a record while exports of steel in the first four months rose 7.6 percent from a year earlier. Iron-ore futures in Asia plummeted after port stockpiles in China expanded to the highest in more than a year.

"A morning of widespread price retreats along with iron ore as Chinese demand appears to stumble again," Michael Turek, the head of base metals at BGC Partners Inc. in New York, said in an e-mail. "April's lower copper imports raises questions about the March spike."

Copper futures for July delivery dropped 2 percent to $2.111 a pound at 10:42 a.m. on the Comex in New York, after earlier touching $2.1025 a pound, the lowest in almost a month.

The Bloomberg Americas Mining Index slumped as much as 4.8 percent in New York, the steepest intraday decline since March 23.

Some Thoughts

China is the latest in a growing line of "command and control" economies that have risen to prominence, captured the imagination of people who find free markets too messy for comfort, and then blown up when it turns out that dictators have no idea how to allocate capital.

First it was the Soviet Union, which looked during its initial decades like a viable alternative to market-based systems. From journalist Lincoln Steffens' famous 1919 observation "I have seen the future and it works" to the 1957 launch of Sputnik, an amazingly-large number of people assumed that it was possible for a handful of men sitting around a conference table to efficiently organize a modern economy. It eventually became clear that they were wrong.

Then came Japan, which emerged from the rubble of WWII to become a global economic power, largely be grafting its semi-feudal samurai tradition onto factory life -- under the direction of its Ministry of International Trade and Industry (MITI). That is, guys sitting around a table deciding what gets built where. This resulted in an epic debt and mal-investment binge from which Japan may never recover.

And now comes China's hybrid Japanese/Soviet model, with various Communist Party organs and shadow banking system entities directing investment from the top down, borrowing immense amounts of money and plucking growth figures out of thin air, which Western media accept at face value. It too seems to be failing, which should come as no surprise but -- given the numbers involved -- should scare the hell out of anyone with a sense of history.