Now the time is fast approaching when the leadership in Beijing has to make a choice, or risk being caught in a middle-development trap that would thwart its ambitions to rival the United States on the world stage.

Its decision will have a global impact if China becomes more economically liberal and open, it will be good for exporters to the world's second-biggest economy. If the Communist leadership fails to reform, it could make the people's republic a more awkward partner that is less able to contribute to the growth the world needs.

The trouble with thoroughgoing reform, which is required if China is to move to a new stage of economic development, is that it would upset the structures on which the Communist Party rests.

Whatever happens, we have to brace ourselves for a period of slower growth from the economy that had been seen as the main source of global expansion. This week's interest-rate cut by the People's Bank of China was a sticking-plaster solution, rather than the kind of reform the country really needs.

The tension has been evident in the recent convulsion of Chinese sharemarkets, which set off an unwarranted global panic at the start of the week. The Beijing government had decided, sensibly given its commitment to financial reform, that companies should be encouraged to raise capital by issuing shares instead of relying on borrowing and increasing the country's debt mountain.

The authorities stepped in to try to prop up prices. But the slump this week showed the limits of that as investors, most of them individuals rather than institutions, took fright. Now the authorities seem to have changed tack again and are ready to let the market find its own level – something they should have done in the first place. 

The uncertainty bred by this switching policy approach has chipped away at the leadership's reputation for competent economic management. This is a risky position: it needs that reputation to instil public confidence in its ability to deliver economic results that gives it the legitimacy it lacks from the ballot box.

But the stakes go much deeper than the performance of China's sharemarkets. The real economy is where the tug of war between economic modernisation and political power is being fought – and the signs so far are that the latter is winning. 

Xi Jinping, the most powerful Chinese leader since Deng, has this year increased the grip of the political power apparatus with a catch-all national security law, the detention of human rights lawyers, stringent new regulations for foreign NGOs and a series of ideological pronouncements warning against Western values.

His approach makes it unlikely that he will relinquish control over the economy, however strong the arguments of reformers. The bottom line is to strengthen the party and avoid change, which could lead to a Gorbachev-style meltdown.

The time for a choice is approaching but the betting must be that it will be for a preservation of the system rather than the structural change China needs. That will shape not only China's future but also us all given the country's global weight.