Xi Jinping's Challenge

Why China's new president has a much tougher job than Barack Obama.

Now that the U.S. election finally is over, it's time to focus on the other most important leadership transition in the world: China's.

Like the United States, China is also at a turning point, and though the specifics differ, the crux of the problem is the same: major structural change is critical to sustained future growth and stability, but the country's current leaders have been unable, or unwilling, to implement the necessary reforms to shift its economy onto a path of sustainable development.

If anything, China's heirs apparent have the harder task.

Unlike Barack Obama, for instance, the incoming leader Xi Jinping won't be able to choose most of his own team. Beginning Nov. 8, when the Communist Party convenes its 18th Party Congress, and continuing in March 2013, Beijing will in two steps replace about 70 percent of the incumbents in its top communist party, government, and military bodies. China watchers expect Xi Jinping and Li Keqiang to ascend to the most powerful two spots on the Politburo Standing Committee, the country's highest decision-making body, but nobody outside a small circle of insiders knows who will fill the other 5-7 spots -- let alone what those individuals think about how to run the world's second-biggest economy and one of its major military powers.

Nor is the president of China as powerful as is commonly assumed. Since Hu Jintao, the outgoing leader, ascended to the top job in 2002, collective leadership built around consensus decision making has become the norm. Each Standing Committee member manages a distinct part of the overall Chinese system. The outgoing premier Wen Jiabao runs the cabinet, Zhou Yongkang runs domestic security, and so forth.

This system has its advantages, such as the ability to mobilize enormous resources and act quickly when all Standing Committee members agree on a priority course of action. But it has also produced a willingness to spend more money on top priorities ("you vote for my priority and I'll vote for yours"), coupled with an inability to adopt decisions that seriously disadvantage any member's sector, such as reducing subsidies to major state-owned enterprises or cutting back the scope of the civilian security apparatus. There have thus been no major structural reforms in China for the past five years, and few in the half-decade before then.

The recognition of the need for sectoral reform of the Chinese economy -- and related political reforms to make that happen -- is so widespread that Xi undoubtedly has this on his agenda. But it is unclear how high a priority he attaches to this or whether he can fairly easily be dissuaded by other considerations.

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.

The results have been clear: breakneck growth, huge infrastructure and manufacturing development, enormous corruption, massive environmental devastation, growing inequality of wealth, and rising social tensions. If they wish to change the behavior of these local leaders, Xi and his colleagues must expend enormous political capital to do so.

And local officials are hardly the only impediments to reform. Beijing has fostered "national champions" -- state-owned corporate behemoths, many of which are seen as key to the party’s grip on power and are closely tied to elite political families. This marriage of wealth and political power presents major obstacles to effective changes in economic strategy.

Corruption at all levels, moreover, makes reforms even more difficult to implement through China's massive bureaucracy. And the fear that reform itself can generate expectations that may get out of hand adds to the hurdles to making necessary changes.

Thus, there are no simple solutions to China's challenges, almost all of which are more difficult than those confronting the United States. In the United States, the core issue is one of gaining a political consensus on federal revenues and expenditures. For China, the challenges require major structural overhaul of the economy and wide-ranging changes in the political system. The complexity of both the problem and the necessary corrective measures are massively more daunting in Beijing than in Washington.

The reforms China knows it should undertake are very much in America's interests -- reducing Beijing's need to resort to unfair trade practices, while at the same time further opening its economy, increasing the role of the market, and allowing greater opportunities for U.S. investments in sectors (such as financial services) in which the United States is highly competitive. In addition, putting China on a path of more sustainable, less environmentally damaging growth increases the chances that its government will be more confident, outward-looking, and constructive internationally. China, in turn, has a major interest in U.S. success in getting its deficit under control, given how heavily Beijing has invested in the health of the U.S. dollar and the American economy.

U.S.-China relations, in short, will almost certainly experience less strain if both Beijing and Washington deal more effectively with their need to undertake significant reforms. If each falls short, the opposite is true. Leaders on both sides should keep this fundamental reality in mind over the coming years.

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Hu Jintao's Legacy

Will China's outgoing leader be the man who introduced the world to a new superpower, or the man who destroyed it? It's too early to tell.

The most noticeable feature of China's outgoing president, Hu Jintao, is his dullness. In his 10 years in power, he's on record making one joke: about hair dye. His dullness is even more startling because the county he heads is one of the most dynamic, fractious, and energetic places on Earth. Although Hu presents a blank face to the world and speaks only in the sterile, generic language of Chinese officialdom, the cities he oversees can change beyond recognition in weeks. Skyscrapers race up, sometimes as fast as a floor a day. Since Hu came to power in 2002, the country has built a multibillion-dollar high-speed rail network from scratch. As the world's eyes turned to China for the opening ceremony of the Beijing Olympics in 2008, Hu simply declared, "The Beijing 2008 Games have opened." Those connected to the party secretary say, with absolute finality, that their leader doesn't do emotion.

Hu's dullness, however, stems from his immense self-control, and it is an integral part of a political personality one can only assume, in the highly strategic world of elite Chinese politics, was chosen very early on. Early biographies state that while a student at Qinghua in the 1960s, Hu was a keen dancer. When did he lose this slight hint of spontaneity? In his decade in power, Hu has maintained rigid control over the nine members of the Politburo Standing Committee, the absolute summit of decision-making in China, which in turn maintained a strong grip on Chinese society. The disgrace of key leaders, like former Shanghai party secretary Chen Liangyu in 2006 and Chongqing party secretary Bo Xilai in March, led to no noticeable fissures or dissent. Hu has adroitly handled unpleasant surprises, like the Tibetan riots in 2008, albeit with vast influxes of central funding and security spending. (Makers of close-circuit televisions in China have grown rich under Hu; rare for a country not fighting an armed rebellion or a civil war, spending on internal policing has outpaced national defense.)

But the world's most cautious, most seemingly egoless leader has made a massive gamble, the results of which will determine his legitimacy. Hu has bet that his half-decade-long strategy of pursuing economic growth instead of political or legal reform will be proven right. He hopes that China does not have to address its immense governance issues until it is wealthy enough to deal with them in a way that minimizes risk. Many party analysts believe that Soviet leaders' decision to reform politics before fixing the economy caused the fall of the Soviet Union: By ensuring strong growth, Hu ensured that China would not repeat the same mistake -- at least not on his watch. But as Hu and his Standing Committee colleagues have focused nearly single-mindedly on growth, the hard and soft costs of policing an increasingly unbalanced China have been rising sharply.

The Hu era -- which ends at the 18th party congress starting Nov. 8, as Hu begins the process of officially yielding power to Vice President Xi Jinping -- started out with a different vision for the country. From as early as the summer of 2004, apparatchiks began to speak of "putting people first" and creating a harmonious society -- in other words, addressing China's yawning inequalities and imbalances in ways that differed from the Jiang Zemin era. Jiang, a relative liberalizer, had successfully encouraged businesspeople to join the party in 2001. The question facing Hu when he came into office was what to do about the huge differences between the rich and the poor across the country.

But beginning in 2007, after the dramatic collapse of Western export markets, Chinese leaders decided to put everything back into maintaining economic growth, no matter how unevenly wealth was spread across society. Hu's original plans to lift taxes on farmers and focus on social welfare were quickly shelved as the party bet that, by keeping the economy humming above all else, it could stay a step ahead of the lower classes' growing anxieties.

Perhaps Hu had no choice but to make this gamble. Perhaps the only way to fend off the public's rising expectations toward government and paper over growing imbalances between wealthy coastal regions and poorer western ones was to keep his foot on the gas. Whatever the case, the country Hu presides over remains as unequal, if not more, than it was the day he ascended to the top in 2002. China may boast more than 96 dollar billionaires now, but 150 million Chinese still live in poverty. The country may have become the second richest in the world on aggregate, but per capita income hovers near 90th, similar to per capita income in Cuba and Namibia. Shanghainese enjoy a per capita income of more than $12,000 a year. Residents of Guizhou, China's poorest province, earn a mere $2,500 a year. Hu, of course, is likely quite aware of all this. The party is nothing if not mindful of how social instability pulled down the Qing Dynasty in 1911 and the Republican government in 1949.

If Hu is successful in transferring power to Xi and his colleagues over the next six months, then the first plank of his legacy will be complete: He will have cemented the institutionalization of party processes and rules, improving China's political stability. If everything works smoothly over the next few weeks and months, at the National People's Congress in March, Hu will follow the constitution and retire as president, having served the maximum of two five-year terms. But the bar for success is high: If China's new leaders are seen as weak and illegitimate, then their ability to push through continuing economic and political reforms will be limited.

After the succession itself, things get trickier. Chinese leaders no longer pretend the current system is optimal. Even Hu talks of the need for reform beyond just fixing the economy. This is, of course, reform with Chinese characteristics -- the question is how the party can modernize and run itself more efficiently so that it can maintain a monopoly on power. But if Hu's successors manage in the next decade to strengthen the rule of law and empower civil society while introducing greater accountability and transparency for the party -- all while managing inequality and other structural challenges -- then Hu's gamble will have proven to be the right one.

If, on the other hand, the leadership splits, social conflict increases, and the party falls behind, Hu's focus on breakneck economic growth at the expense of reform will seem shortsighted. The Chinese Communist Party could be consumed by its own internal battles, while society grows ever more imbalanced and unstable -- maybe even exploding in anger so powerful that it brings down the system itself. And many in China will find themselves wishing that Hu had made a different bet.