More evidence this week that the Chinese economy is slowing. Manufacturing activity in April increased at a slower pace than what was expected and what was reported the previous month. And that followed earlier reports showing first quarter GDP slowing to a 7.7% annual rate compared to 7.9% in the fourth quarter.

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By comparison, first quarter growth in the U.S. was less than one-third the rate in China. The U.S. economy grew at a 2.5% annual rate in the first quarter following 0.4% in the fourth quarter.

Clearly both mega economies are slowing but at very different rates.

“Even 7.5% or 7.7% growth is something we would kill for,” says Niall Ferguson, professor of history at Harvard University. He recently spent a month in China and spoke with The Daily Ticker at this week’s Milken Institute Global Conference about what he found.

The “hot button debate” in Beijing right now, he says, is not about democracy but about the rule of law, which the U.S. and other developed Western countries have historically used to help expand their economies, says Ferguson. It requires an independent judiciary and courts people can trust.

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“It’s hard to get to the rule of law if you don’t have a well-developed judiciary…and a tradition of the rule of law," Ferguson says. "That’s something that will take years.”

Another challenge for the Chinese economy, says Ferguson, is dealing with growing levels of local government debt financed by a shadow banking system and using off-balance sheet vehicles to maintain investment in real estate.

At some point there will be overreach and some of the new institutions providing credit – in place of the central bank and big banks—will experience difficulties, creating a “small China crisis” in the next 12-24 months, says Ferguson.

“There will be some kind of correction, maybe a shakeout in local government finance. Some institutions will go bust…but it won’t take China’s growth rate down massively,” says Ferguson.

China’s growth may also slow as the country tries to “transition from an export–led economy to one that is domestically driven" and incorporates the rule of law, but it won’t implode and experience the hard landing that many have feared, he says.

Ferguson expects China to continue to grow faster than the U.S. in the short-term but be stymied by demographic problems (its aging population) and environmental problems in the long-term.

“Longer term over the next 20, 30 or 40 years, I’m quite bullish on the U.S.,” says Ferguson. “Many parts of the U.S. are already recovering strongly, from Utah to Texas to the Dakotas, but I’m nervous about what’s Washington is doing” and what some states are doing. “I see an opportunity being frittered away here because of excessive regulation and too many lawyers."