There is a fear among some experts that if China's economy softens, the dry shipping industry could tumble hard. DryShips (NASDAQ:DRYS) says that the fears are overblown. Navios Maritime Holdings (NYSE:NM) sees nothing but blue skies. Diana Shipping (NYSE:DSX) is on the fence. Hedge fund manager and shipping expert Jay Goodgal is convinced that the sector is doomed, however. Despite all this, sorting through the China mess may be easier than you think.

Fragile China
These days, no factor is more influential on global dry shipping rates than China's imported iron ore demand. With 70% of world's shipments of iron ore on the high seas and heading for China, this single country's demand accounts for more than double the rest of the world combined.

Goodgal and others have been warning that the Chinese economy is slowing, fragile, and only being held up by loose money and credit. Total Chinese debt has risen to 230% of the gross domestic product, compared to just 125% in 2008. Worse, it is possible that the first quarter may show the slowest GDP growth in 24 years.

China's five largest banks account for 50% of all loans. Last year, bad debt write-offs jumped 127%. Loan quality is expected to only get worse this year according to Liao Qiang, senior director at ratings agency Standard & Poor's.

The latest move
So what's the latest response from China to combat its debt problems? You guessed it: more easy money. Premier Li Keqiang announced a "mini stimulus" that includes larger tax breaks for businesses, more social housing, and more railway construction. This includes the China Development Bank setting up a special agency to issue home financing bonds.

Oh boy, it sounds more and more like the situation in the U.S. before 2008, doesn't it?

Diana Shipping cautions that the government must change or face an economic, credit, and debt bubble burst for which the worst case scenario would be devastating consequences that would be felt throughout the world financial system. Sounds scary.

On the positive side, Diana Shipping CEO Simeon Palios is hopeful as long as the Chinese government can manage to transform its economy away from a debt economy. He said, "If they succeed then China will emerge and [be] more stable and definitely become the largest economy in the world."

DryShips CEO George Economou notes in a recent interview that despite the slowdown, robust growth is still occurring. The bigger China's economy gets the harder it will be for it to grow at the same rate due purely to sheer size, but growth is still strong for shipping. For example, each 1% rise in China's GDP today is the roughly equivalent to a 2% rise in 2008 due to the Chinese economy doubling in size. DryShips is quick to dismiss the panic and is in the process of positioning its fleet to take advantage of a hopeful rise in shipping rates.

Meanwhile Navios Maritime Holdings believes that further slowing in China's economy could actually work in the industry's favor. In its latest conference call, CEO Angeliki Frangou forecasts the market rate for iron ore prices to fall under $100 per ton due to significant expansion in production from mines around the world this year and beyond.

Navios Maritime Holdings believes that in addition to the extra expected supply, any further weakness in Chinese demand could sink market iron ore prices even further below $100. At iron ore prices that cheap, domestically produced iron ore in China simply cannot compete with imported iron ore. Domestic iron ore is of much lower quality and is much more expensive to mine in that country. Navios Maritime Holdings notes that urbanization continues regardless of the economy; as iron ore prices fall, China will have little choice but to turn to increased imports for its needs.

Both Navios Maritime Holdings and DryShips explain that it's not necessarily just the Chinese economy that is important but the level of imports. Both companies firmly believe imported iron ore demand is set to increase regardless of slowing growth in the economy.

Foolish final thoughts
There may have to be a severe economic collapse that practically grinds construction activity to a halt in order to hurt imports. While that could happen someday, as Goodgal believes and as Diana Shipping fears, no obvious evidence has emerged that it will happen any time soon. China appears more than ready to fight (or continue to inflate) for at least the medium term time frame.

Consider this: Last year, around two-thirds of China's iron ore consumption was domestically produced. This leaves a lot of room for potential growth in imports; regardless of the total demand, imports may take "market share" from domestics. Meanwhile, the domestic iron ore market is even more fragile than China's banking sector due to pricing -- its pain is DryShips, Diana Shipping, and Navios Maritime Holdings' gain. Look for a further drop in iron ore prices to signal the dry shipping party is in full swing.