In his first appearance as re-installed prime minister, Kevin Rudd dragged China front and centre into the Australian election campaign.

“The global economy is still experiencing the slowest of recoveries. The China resources boom is over … and when China represents such a large slice of Australia’s own economy, our jobs, and the opportunities for raising our living standards, the time has come for us to adjust to the new challenges,” he said in his first press conference as born-again PM.

Australia and China’s fates are ever more intertwined. It’s our largest trade partner by a country mile; $125 billion versus second-placed Japan’s $75 billion.

Rudd’s strategy in calling time on the boom was effective, a clean break from the increasingly hard to swallow “the economy is fabulous” message peddled by Julia Gillard.

But the reality had been clear for some time: China’s economy is slowing more seriously than was expected at the start of the year, and Australia’s Treasury has its forecasts on China wrong. Yesterday Reserve Bank chief Glenn Stevens backed up Rudd and held rates at their all-time low of 2.75%.

“The economy has been growing a bit below trend over the recent period … this is expected to continue in the near term as the economy adjusts to lower levels of mining investment,” Stevens said.

Last week, it became more apparent that it’s not just a slowdown China is having, but something of a mini-crisis. And they have a nasty way of getting bigger. The People’s Bank of China (PBOC) stood aside while interbank rates — the rates banks lend to each other — soared. This placed banks holding too much unserviceable debt in peril and potentially placed smaller banks in danger. It was a message that loose credit and sloppy lending won’t be tolerated.

China’s former Hu Jintao / Wen Jiabao administration’s once-lauded 4 trillion yuan stimulus (that may have been triple that if you add in state-sponsored lending) is now proving a rod for the new leadership’s back. The stimulus has created dreadful habits in its banks and a massive shadow banking system. China’s debt-to-GDP ratio has soared from 70% to 200% in five years.

The Chinese government has been saying for the past year that it wants to slow the economy. Its concerted action on the property market has had some effect, but there are still few other places apart from the banks and property for Chinese to keep their money. Unlike the central bank in Australia (and other real market economies) the PBOC is far from independent, dancing to the tune of the Communist Party’s powerful Leading Group for Financial and Economic Affairs, headed by Premier Li Keqiang.

“China’s economy is slowing more seriously than was expected at the start of the year, and Australia’s Treasury has its forecasts on China wrong.”

This was a shot across the bank’s bows by its masters, a pullback on the go-go credit growth that is continuing to create non-performing loans and overcapacity in industry. Exhibit one: China’s overproducing, loss-making steel sector.

It’s the first strong sign that Li and his boss, Chinese President Xi Jinping, are serious about reform. Now there will be a deathly period of calm until the Communist Party’s third plenum in October while the new leadership tries to beat back its internal critics and finalise its first reforms.

Last Friday, Li was reported to have said that growth could fall as low as 7% — that’s a full one percentage point lower than Australia’s Treasury forecasts — for the next couple of years. Xi said: “We should never judge a cadre [a member of the Communist Party] simply by the growth of gross domestic product.”

Cadres are judged on guanxi (“personal networks”) and attracting investment and economic growth. But this is changing as people grow angrier about the environment — Beijing’s air pollution is into ultra-dangerous territory again, and polluted rivers, chemical factories and the rapidly diminishing water table are all major concerns.

In all, it’s been an extraordinary couple of weeks in China. As well as the bank wobbles, and doom-laden economic data, Xi has launched a “mass line” campaign aimed at cleaning up his corruption-riddled Communist Party.

At an unprecedented four-day meeting of the Central Committee of the Party’s Politburo — the top 23 men and two women in the 85 million-strong organisation — Xi told his comrades they must “strictly abide by party discipline and act in strict accordance with policies and procedures”. He warned darkly they should “strictly manage their relatives and their staff and refrain from abuse of power”.

In 2009, Rudd ramped up spending to help dodge the GFC. Rudd splurged about $50 billion — government spending went from $272 billion in 2007-08 to $316 billion in 2008-09. That was the borrowed dividend of the once-in-a-generation mining boom spent on Chinese flat screen televisions. Kicking the can down the road.

The relentless economic gloom from China is particularly bad news for our two single biggest earners, iron ore and coal, as demand falters while fresh supply comes on-line.

“[The first half] of 2013 saw prices of Australian-origin coking coal continue the weakness evident after the third quarter of 2012. Unsurprisingly, coking coal prices mirrored the collapse of iron ore prices, in a climate of poor conversion margins and weak finished steel prices in China. Quarterly negotiated prices slumped by -24.5% between Q3 and Q4,” the Steel Index report said yesterday. Ouch.

As well as flicking the switch to economic fear and loathing, Rudd is also invoking his record as an economic saviour. This time there’s no money in the tin and no Chinese stimulus to gild the lily.

Rudd mapped out the next steps in the economy this way: “New challenges in productivity. New challenges also in the diversification of our economy. New opportunities for what we do with processed foods and agriculture, in the services sector, and also in manufacturing.”

Chinese investment is something upon which the Coalition has struggled to come to a united, credible position. Rudd, on the other hand, in preparation for a possible return to the top, has been furiously working to repair his tattered image in Beijing over the past year, making multiple visits which often doubled as speaking engagements.