China’s economy seems to be in trouble, which could be a very big problem for the world unless China’s leaders and trading partners ensure that economic strains in the world’s largest exporting nation do not lead to trade confrontations around the globe.

China’s housing bubble appears to be imploding, steel production is falling along with the demand for new construction and real estate developers are tottering, putting banks at risk. The Chinese government, which had been trying to curtail credit to slow the bubble’s rise, abruptly changed course last month, reducing the amount of money banks must keep in reserve at the central bank for the first time since 2008. On top of everything else, foreign demand for Chinese exports has slowed.

A hard landing in China would have an immediate impact from Brazil to Russia, whose exports of steel, lumber and other commodities fed China’s construction boom. And it will slow the world economy, which relies on China as one of the only remaining engines of growth.

But the bigger risk could be a trade war. Chinese leaders eager to hang on to power by showing continued economic growth may be tempted to pursue beggar-thy-neighbor strategies and subsidize exports in ways that would further destabilize a fragile world economy already buffeted by a crisis in Europe.

There are worrying signs that Beijing is going the wrong way. Earlier this month, it imposed a volley of duties against American-made sport utility vehicles. It will have little economic importance as few of these vehicles are sold in China. But analysts viewed the move as a warning that China will retaliate against Washington’s efforts to combat its subsidized exports. And the pace of appreciation of China’s currency has slowed markedly.

The Obama administration must also act with care. It is justified in challenging illegal trade practices, including pursuing its case at the World Trade Organization against illegal subsidies of Chinese makers of solar panels. But it should act multilaterally, including mustering other countries to add to the pressure on Beijing to act by the rules. Unilateral initiatives, like those in Congress to punish China for its cheap currency, are likely to cause more harm than good.

The ball is, however, in China’s court. Beijing must understand that it is a bad idea to double-down on an export-led strategy. There are better alternatives, including sensible stimulus measures like investing in low-income housing and expanding government-run health insurance. These would boost consumer spending and growth, reducing China’s dependence on export markets and investment bubbles. A policy switch like this would stimulate global growth. Sticking to the old game plan will drag the world down.

http://www.nytimes.com/2011/12/27/opinion/dealing-with-chinas-troubles.html?_r=2&src=recg