And even if Xi proves to be an ardent reformist (which is by no means clear), he may prove unable to move the system sufficiently in the directions he knows it must go. Wen has called for such changes for at least the past half decade, even as the system has in fact moved in the opposite direction. Success or even rapid progress here is far from assured.
The hurdles are high for Xi. Because he does not even get to pick most of the members of his own team, virtually no other Standing Committee member will owe his job solely to him -- current and former members select the lineup of the new Standing Committee in order to achieve a balance among their interests. It may take an impending or actual major crisis, therefore, for Xi to garner the authority to drive through necessary but painful decisions.
And painful decisions are essential to avoid snowballing structural drags on growth and heightened social tension and instability. With the government already spending more on domestic security than on the military in the face of a reported 180,000 "mass incidents" in 2010, serious reform is necessary.
The outgoing leadership of President Hu and Premier Wen has in recent years chosen to muddle through, handing off the problems to their successors. But China's huge economic gains over the past decade primarily reflect the payoffs from reforms made in the decade before that, including the privatization of housing, drastic downsizing of state-owned enterprises, restructuring of the banking system, joining the WTO, and expanding the political base of the party to include businesspeople. Despite early signs that Hu and Wen would continue to promote reforms meant to improve social equality and rural living standards, these initial initiatives took place years ago, and problems have since multiplied.
Beijing's economic strategy must be drastically overhauled. The Hu/Wen leadership, recognizing the danger, in March 2011 formally adopted a new development strategy that stresses increasing household consumption, reducing reliance on exports, expanding services, and moving to more innovative, less resource-intensive manufacturing. A study released this February by the World Bank in conjunction with the State Council Development Research Center, one of China's top government think tanks, confirmed the importance of this new strategy. But little serious reform has happened to date.
A key obstacle is that the old way of doing business is now built into the DNA of the leaders of the roughly 40,000 political jurisdictions outside of Beijing, from the province to the city to the county to the township level. These officials, rewarded primarily on the basis of producing rapid GDP growth while keeping a lid on social unrest, have used their political power to nurture infrastructure building and other capital-intensive projects. This in turn has generated short-term GDP growth and employment, along with massive flows of bank loans and other funds from which they can skim.
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