China’s top 370 leaders huddled together for a long weekend and then finally emerged to produce a communique promising economic reforms that the Chinese media hailed as “a new historic starting point.” Global Times, the English-language newspaper, claimed that the reforms agreed at the meeting would prove just as historic as those ushered in after 1978 when Deng Xiaoping came to power and opened the country’s doors to the outside world.

Evidence of this, all the eager China-watchers declared, was the promise that the role of market would be “decisive,” a clear upgrade from the previous guidance that the market role was “basic.”

Skeptics abounded, especially since the document was opaque about what would actually happen. As if stung, China released a fuller account, listing 60 reforms that answered some of the skeptics and seemed to justify the optimists.

Among the promises were relaxation of the notorious one-child policy, easing of the hukou family register system, ending of the “education through labor” camps, less use of the death penalty, and a host of economic and financial liberalization measures that together should make China more hospitable to private enterprise.

The markets moved enthusiastically. Reuters, in talking of China’s “boldest set of economic and social reforms in three decades,” quoted Xu Hongcai, a senior economist at the well-connected think tank China Center for International Economic Exchanges, as saying that “The reforms are unprecedented.

Reforms in 1990s were limited to some areas. Now reforms are all-round.”

Cheng Li of the Brookings Institution said the reform plan is “very much in line with President Xi Jinping’s Chinese dream … the rejuvenation of the Chinese nation. … A turning point in China’s economic development.”

So all in the China economic and social garden is lovely then? Well, not quite. The New York Times pointed out that China’s leaders “were silent on when and how they would carry out these reforms.”

The Financial Times commented that although the list of reforms is “impressive and wide-ranging,” what was striking about Xi’s blueprint “is how much it was about streamlining and tweaking policies that already exist and how little marks a true break with the past.”

In the weeks before the meeting, Xi himself had tried to encourage a growing sense of excitement about a broad and sweeping series of economic reforms that will take the country to the next stage of its development and avoid the notorious “middle income trap.” Economists at the International Monetary Fund (IMF), World Bank and other think tanks, urged him on believing that China is at an economic crossroads.

Xi promised that the economic door that Deng Xiaoping opened “will never be closed again. The reform and opening up are a never-ending process.” He singled out acceleration of a new style of industrialization, promotion of technology, urbanization and agricultural modernization in his tours of the country and meetings with foreign leaders that laid the path to the party meeting.

But why does China, the most successful economy of modern times, have to be concerned as it still motors along at 7.5 percent growth — if you believe the Chinese figures — and has transformed the country into the world’s leading trading power and on track to surpass the United States as the world’s biggest economy by 2020 or 2030. It may already have passed the U.S. if you adjust the figures, according to some economists.

Anoop Singh, director of the IMF’s Asia-Pacific department, believes that: “China’s economic challenges are growing and accelerating reform is critical for containing risks and achieving a smooth transition to sustainable growth.” Now is a good time because fears that China’s overheating economy may be in for big trouble have subsided. The IMF forecasts that China’s growth will be slightly above the official 7.5 percent target in 2013.

But Singh cautions, as most other economists including Chinese have done, that “China’s growth model is under stress.” He points to the usual suspects of heavy reliance on capital accumulation, and the rapid rise in credit, which has soared from 140 percent to 200 percent of gross domestic product in the last four years.

In other places, widespread mispricing of risk and a buildup of asset quality problems have accompanied such rapid credit growth. In China, the rise in credit has been accompanied by increasing debts, especially by local governments that have used infrastructure building as a counter-cyclical tool to keep the economy moving and have used off-budget financial vehicles to pay for the construction.

The IMF calculated that after including this additional infrastructure-related borrowing, total general government debt is about 45 percent of GDP, or twice the official figure. Singh comments that “This is still manageable, but it does suggest less fiscal space to deal with unanticipated events than the reported headline number indicates.”

Dependence on capital accumulation is another vulnerable aspect of China’s growth, the more so since capacity is still being built in excess of final consumer demand while returns to capital are diminishing.

Meanwhile, China’s demographic clock is ticking and surplus labor will soon be exhausted and the country’s population has begun to age. Belatedly allowing couples to have more than one child may not work because they have got accustomed to one and will see a second as a drain on their energy and income.

Xi must ensure that resources are used more efficiently and ensure that growth is more inclusive and consumer based. All this requires financial and fiscal reforms, and big structural changes to contain the buildup of risks, enhance the efficiency of investment and boost household income.

In modern jargon, it is a big ask, especially since it requires curbing the powers and privileges of entrenched vested interests. China has to move away from administrative guidance and toward more open and transparent ways.

The powerful state-owned enterprises (SOEs) have to be reformed and made to contribute to taxation. Local governments have to be given more autonomy but also made more accountable. Above all, China’s economy has to be made more consumer-driven rather than investment led.

David Dollar, a senior fellow at the Brookings Institution after a distinguished career as director of the World Bank’s China office and as the U.S. Treasury Department’s emissary to China, in a thoughtful paper lists key institutional features of China’s model that need to be changed.

He cites: “The hukou system limiting rural-urban migration, the large role of state enterprises in the economy, financial repression and the system for evaluating and rewarding local government officials. These factors together create a heavy bias in the Chinese system against household consumption and in favor of investment and exports. Reform of these institutional features provides the best hope of smooth adjustment of China’s economy away from investment toward consumption.”

Dollar cautiously thinks that the leaders will not tackle reform of the SOEs directly. Their reform will come indirectly through financial liberalization and the opening up of more sectors to private investment. But he stresses that China needs more openness in order to have an innovation-led economy. Greater economic openness would spur innovation, but Dollar points out that the middle-class wants freedom of movement and discussion, or more professionals will leave the country.

But Xi has gone out of his way to smash hopes of political reform. Internally, the party has been conducting “mass line” and “self-criticism” sessions, while political and human rights activists have been rounded up and censorship tightened.

In terms of the slogans and the criticism sessions, Xi’s China is reminiscent of Mao Zedong’s China. Xi has clearly remembered the Soviet experience that political reform is a potentially dangerous genie to let out of the bottle for a communist government.

Chris Buckley of the New York Times wrote that Xi had admitted to watching the film “The Godfather” and may have learned from it how to exercise power within a small elite group. This could see the emergence of an imperial presidency, something that some Chinese welcome, seeing Xi as a successor to Deng, who will smash through the growing economic roadblocks; but others fear it, seeing him as a good comrade of Russian President Vladimir Putin.

There are fundamental problems with an imperial presidency. There is a contradiction in expecting an emperor to preside over a move from a government-run autocracy to a system where transparency and market-influenced policies are the rule.

Xi also expects the giant SOEs to lead his economy, which is potentially another contradiction to a system where the market has a decisive role.

This leads to China’s $64 zillion dollar question — whether it is possible to liberalize the economy while trying to tighten the political grip. And of course, all the economic progress would risk being blown out of the water if China pursues an aggressive foreign policy that leads to clashes with Japan or other neighbors.

Kevin Rafferty is a professor at Osaka University.

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