There is a nightmare scenario for China's economy, and it looks something like this:
With the euro zone sunk in recession and high unemployment in the United States depressing household consumption, weak international demand weighs heavily on China's export sector.
Anxious to maintain growth rates and job creation, the authorities in Beijing sanction an increase in domestic credit in the hope that easier access to funding will encourage firms to step up their pace of investment.
New lending, both directly by the country's state-owned banks and indirectly through shadow-system institutions like trust companies, duly surges.
Unfortunately, things don't quite work out as Beijing intended. With many industries already suffering from overcapacity following the 2009 to 2010 investment binge and profit margins under pressure as a result, companies, especially in the private sector eschew further capital spending on new capacity.
Instead, borrowers channel the funds into high-risk speculations in the property, commodity and equity markets. Asset prices pick up smartly, creating the impression of a robust economic recovery.
Meanwhile, with the credit taps open once again, local officials seize the opportunity to launch prestige infrastructure and property development projects in the hope of advancing their own careers. The number of unproductive vanity projects mushrooms.
The consequence is a rapid rise in liquidity, which soon pumps up dangerous asset price bubbles and consumer price inflation.
At the same time, with company profits suffering, employment prospects deteriorate.
Consumption among those not lucky enough to be riding the asset bubbles stalls, and real economic growth slows deeply. Suddenly China's leaders find themselves in one of the nastiest situations economic policymakers can face: stagflation.
If they keep the credit taps open, the asset bubbles and the inflation rate will only get worse. If they close off the supply of credit and tighten monetary policy, growth will slow even further, asset prices will collapse, and they run the risk that many of the new loans will turn bad, triggering a banking crisis that could weigh on growth rates for years to come.
That's the nightmare scenario, and some of the gloomier private sector economists believe that's exactly the direction in which China is now heading.
It is always a mistake to read too much into one data point, especially when it straddles the Lunar New Year, but over the last few days, a number of analysts have noted the alarming deterioration in export orders and employment prospects that showed up in the manufacturing purchasing managers' indices for February (see the first chart).
At the same time, credit growth, especially through the non-bank shadow market, continues to expand rapidly (see the second chart), helping to lift property prices.
If this really is the nightmare scenario unfolding, however, don't expect to see the evidence showing up in China's headline growth and inflation figures.
On past experience, Beijing's number crunchers will take the economy's figures for nominal growth, and adjust the deflator they apply (which they don't disclose to the world at large) to show a solid real growth rate and a modest implied economy-wide inflation rate.
If that prospect is too pessimistic for you, I should point out that there is a handful of even gloomier analysts who believe the nightmare is already upon us, and that China's real growth rate last year was closer to 5 per cent than the official 7.8 per cent rate announced in January, while the true inflation rate was far higher than official numbers imply.
Let's hope it's all just a bad dream.