China’s recently installed Premier Li Keqiang last week nailed his colours firmly to the mast as a prospective major economic reformer. Necessity being the mother of invention, he had little choice: China’s economic model has hit a brick wall, growth is stuttering and further stimulus is increasingly being viewed as the debt straw that would break the country’s banks.

There is short-term bad news in the Chinese predicament for Australia. Treasurer Wayne Swan’s forecast of 8% growth in China during 2013 in last week’s budget — remembering China takes more than 30% of our exports — is now at the very high end of estimates. Market consensus is moving towards 7.5%, a figure based on rubbery official statistics, with more reliable indicators pointing even lower.

Talk, of course, is cheap and there has been plenty of reformist talk from China’s leaders for over a decade with only limited action. But in Beijing there is a new urgency in the air, with growing concerns about the massive amount of loans — both existing and being pumped into the system.

Rather than the promised rebalancing of its economy towards consumption and services, China is ever more dependent on heavy industry, government investment and real estate for its economic growth.

It’s worth remembering that the Chinese government wanted to slow the economy in order to rebalance it without causing a sharp shock, yet it’s already apparent that this plan is not working smoothly and some stronger medicine is required. Li and new Chinese President Xi Jinping are well aware of this, but their challenge is to negotiate the powerful interest groups that have become an integral element of the Chinese corporate state without killing the patient.

A slower China means lower prices for our commodities — total volumes would still rise because supply is increasing on the back of investments made during the boom. Already another iron ore price slide is underway, with its price curve  starting to look awfully similar to last year, when it started the year very high then plunged to below $100, causing problems for all but the biggest two miners (BHP and Rio).

There is an upside in that the Australian dollar has also been sliding (one dramatic report at the weekend likened it to a falling knife), pinned down by mounting concerns over China’s medium-term growth trajectory; frankly it’s about time and good news for those Australian manufacturers that have survived. This also means stronger investment flows into Australia — especially from China — as assets become cheaper.

“Government censors last week issued a broad missive to universities that has been quickly branded the ‘seven don’t mentions’ … “

In a speech last week, Li promised to tear down barriers to private investment that are stalling China’s economic trajectory. But it remains to be seen how this is defined. The Chinese Premier declared his faith in the market as the prime factor in economic wellbeing, signalling a reverse of 10 years of creeping state influence under the torpid reform environment of the decade long Hu Jintao/Wen Jiabao regime. Li said:

“If we want to hit this year’s growth targets [the government’s official target is 7.5%], the room for stimulative policy, and direct government investment is narrow, so we need to rely upon the market mechanism. [The] market has a self-adjusting mechanism. If we over-rely on government to guide and policy to push growth, it’s difficult to be sustainable, but it will create new risks and problems. The market is the creator of social wealth, it’s the internal source of economic development. Today, private investment still has a big potential.”

More bearish China-based economists such as Michael Pettis and Patrick Chovanec believe that meaningful economic reforms will slow economic growth to well below 7%, which would mean a brutal reality check for Australia. Yet as China rebalances and opens up its economy, it will help Australia rebalance its own economy away from its over-reliance on mining and boost services sectors like health and finance, which should be able to sell their knowledge, expertise and models into China. Australia’s leaders also need to do some heavy lifting — and overdue reforms of their own.

The schedule of reforms will officially be signed off at the Communist Party’s Third Plenum due in October, but in all likelihood a number of measures will be implemented before then, such is the urgency.

In the endless contradiction that is modern China, alongside growing signs that the new leadership is very serious about economic reform, there are fresh signs about a renewed crackdown on free speech and liberty in the world’s second-largest economy. Government censors last week issued a broad missive to universities that has been quickly branded the “seven don’t mentions”, warning them off talking about: universal values, freedom of the press, a civil society, civic rights, historical mistakes committed by the Communist Party, elite cronyism, and an independent judiciary.

This push-me-pull-you between economic reform and the visceral desire of the Communist Party to maintain its vice-like grip on the levers of power is at the heart of China’s problem.