FORTUNE — You can get whiplash from reading the economic news coming out of China these days. One month the skeptics hold up weak industrial output and exclaim, “Crash ahead!” The next month, the bulls are back celebrating things like China’s 7.7% GDP growth last year.
The latest sign of China’s economic to-and-fro was the recent stock selloff. Chinese shares dropped by 15% over the last couple months, doubling the decline of other emerging market shares, in what seemed like a panic signal from traders worried about China’s ability to weather upcoming obstacles, including tightening runaway credit and undergoing a massive pivot away from huge infrastructure projects to more sustainable economic growth.
The reports have been back-and-forth for the past six months, but overall they hint at some dark clouds ahead. Here, then, is a breakdown of the indicators’ recent history, where the economy is now, and where it could be headed.
Six months ago, China’s Purchasing Managers’ Index, or PMI, a key gauge of the economy’s strength, was hitting 16-month highs. The economy looked to be stabilizing after a couple disappointing quarters. The PMI news boosted confidence that the country’s new leadership in President Xi Jinping and Premier Li Keqiang could tackle rampant shadow banking and banks’ excess-lending without killing growth. The chief concern back then seemed to be how much the Fed’s cutback in bond purchases, or tapering, would hurt China’s economy.
The good spirits were followed by skyrocketing housing prices through the end of last year. Prices rose nearly 30% year over year in December in Beijing and Guangzhou. At the same time, prices in some of the country’s smaller third- and fourth-tier cities fell. There’s now a break in the market: China’s most affluent cities are still booming while smaller ones are starting to falter. “If they continue to drop, that will mean banks will have more nonperforming loans, and they will have to further contract lending,” says Ran Tao, Acting Director at Brookings-Tsinghua Center in Beijing and professor of economics at Renmin University. “Finally, if there’s a credit crunch, the housing bubble may burst.” That could start in the smaller cities, and then make its way to the bigger ones. Rising real estate prices can be healthy for any economy, but in China they’re rising so fast that the odds of a crash are growing with them.
In January, an unnamed source — most likely the government — bailed out a $500-million risky bank investment called Credit Equals Gold No. 1. While China averted the first default in its trust industry– an industry that last measured around $1.6 trillion in size and is tailored for rich people searching for high-interest investments — the news wasn’t encouraging. What does it say about other bad bets lurking in the shadows? Was this reminiscent of two Bear Stearns hedge funds blowing up in mid-2007, which intimated problems elsewhere in the financial system?
In the beginning of February, China’s PMI fell to 50.5, a six-month low (above 50 signals growth). The numbers came just after the news that China posted still-impressive 7.7% GDP growth in 2013. The PMI number was scary because it portended a potential deep slowdown as the country tightens credit and shifts away from a reliance on exports. Everyone knows China eventually needs to shift its economy, but that process won’t necessarily be smooth. The falling PMI was a reminder of that.
And about that emerging markets selloff the past couple months: Deutsche Bank took a closer look at the figures and found something revealing. The analysts focused on the difference between the stock performance of China’s H share index and A share index — the difference being that H shares are listed in Hong Kong and widely held by global investors, whereas A shares are listed in the mainland and not open to foreigners. What they found was that during the two months leading to mid-February, the A share index fell only 6% while the H shares dropped 16%. They concluded that the stock market wasn’t punishing China, but throwing it out with all the other emerging markets. They wrote, “The only meaningful explanation for the 10% under performance of the H share index is the indiscriminate selling of emerging market equities by global investors.”
The stock market offers some optimism for the Chinese economy facing plenty of other ups and downs.