The Chinese government announced Monday that the country’s economic growth had slowed for the second consecutive quarter, reaching a low of 7.5 percent. The official number fell within the expected range and was well received by international markets; it marked a high note for Beijing’s ongoing attempts to temper global expectations as it shifts to a more sustainable economic model. However, far more important than the officially sanitized growth numbers will be the outcome later this year of the Central Economic Work Conference, where the Chinese political elite will set the tone of the country’s economic policy.

China appears to be faltering in its efforts to instill some economic maturity, especially in the face of the general global downturn and increased international skepticism over Beijing's self-reported figures. Concerns over a hard landing for China have prompted calls for the Politburo to ease its commitment to hardline restructuring in favor of some relief measures. Such a move would temporarily relieve economic problems, but could have a negative effect on the credibility of China’s reform efforts.

The unavoidable truth is that the growth model China has carried for about the past decade is no longer sustainable. This reality check can be a dangerous thing for a country as beholden to foreign investment and low unemployment as China. The country’s leadership is focused on reshaping the expectations of breakneck growth that were for years the key to Beijing’s legitimacy. It has signaled its intent to carry out structural reforms to reinvigorate its economy, which is currently beset by overcapacity, inefficiency and overwhelming financial malaise.

Europe's financial crisis shows no sign of relenting, while in the United States, economic recovery remains modest. China therefore must acknowledge that a significant part of the external demand that once supported its economy will not come back. This effect will be compounded by the declining pool of cheap and accessible labor on China's coasts and the enormous challenges that accompany the development of the interior as a viable basin for investment and exports manufacturing.

Increased internal consumption is the alternative to a failing export model, but Beijing’s structural reforms have had a constraining effect. Despite the leadership’s efforts to build up a strong consumer base in China, average consumption has decreased as wealth allocation imbalances have deepened. The purchasing power of the country’s middle class, which is still in its infancy, is shrinking.

Additionally, China's drive toward an internal consumption model has been hindered by long-held social challenges. For example, the hukou (household registration) system prevents rural migrant workers from accessing social services in cities, thus constraining the process of urbanization, a key driver of domestic consumption. Another example is China’s underdeveloped social welfare system, which forces people to save a significant portion of their income as insurance for health and retirement costs, discouraging unessential spending and slowing the growth of the domestic Chinese economy. These two issues also contribute to an overarching and growing imbalance of wealth throughout the nation that must be addressed if a stable domestic economy is to be achieved.

A more acute danger to the country's financial health is the deterioration of China's lending-driven growth model, characterized by an increasingly bloated real estate bubble and soaring risk for the country's financial institutions. It will be painful for the leadership to break away from the old growth model while it hopes for the best in a lower-growth correction cycle.

Beijing faces two options. Either it will allow the bubble to continue inflating, risking a major crisis event in the future, or it will institute painful structural reforms.  Last month’s decision by the People’s Bank of China to refrain from injecting liquidity into the economy following a spike in interbank lending rates indicates that the new leadership in Beijing is leaning toward the latter. However, cutting liquidity and local government financing too drastically may lead to a wave of loan defaults, soaring unemployment and social instability.

Beijing’s resolve in these reforms is likely to be tested ahead of the Central Economic Work Conference agenda as large loan defaults, corporate bankruptcies and mass layoffs reinforce calls for the temporary relief of financial and monetary easing.