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US Concerns Grow Over Chinese Economy

Washington insiders bemoaning political gridlock and powerful vested interests is not unusual, but it becomes surprising when the target of concern is China.

Christan Kober | Robert Harding World Imagery | Getty Images

Ahead of the US election, Washington is worried about whether the politicians can reach a budget deal after November 6 to avoid the "fiscal cliff". But China watchers in the US fear Beijing is on the verge of a similar moment of truth as the Chinese Communist party prepares to unveil its new generation of leaders in two weeks.

The pending Chinese leadership change has crystallized a significant shift in US views of China, from the unstoppable steamroller that surged out of the 2008 financial crisis to a more familiar story of a government unable to make tough decisions in the face of powerful interest groups.

"Both China and the US are now at a critical turning point, where past approaches require a major change or they will face real economic dangers," says Ken Lieberthal, a former White House official now at the Brookings Institution. "In the US it is our fiscal situation, in China it is the need for major economic restructuring."

While China's economy has recorded near double-digit growth for the past decade – transforming large swaths of the country and improving the lives of hundreds of millions – the emerging US view of President Hu Jintao and Premier Wen Jiabao is of leaders who have fumbled efforts to introduce economic and political reform.

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Beijing has long talked about the need to shift China's economic model from investment and exports more towards consumption and services. Politicians including Mr. Wen have also talked about the need for a more open political system.

While there have always been some skeptics in the US about the Chinese leaders' ability to push through such changes, that kind of pessimism about the prospects for reform in China has become more widespread over the past year.

During previous transitions, observers paid much attention to the biographies and personalities of the new Chinese leaders. This time, however, there is much more focus on whether the Chinese political system has become too clogged by special interests to tackle difficult problems.

"The issue is not whether the new leaders introduce reforms, it is whether they can implement those reforms," says Stapleton Roy, a former ambassador to China.

Mr. Roy says the success of a number of state-owned companies over the past decade has created a "Frankenstein's monster" that the party cannot easily control.

"Their monopoly position has allowed them to acquire vast monetary assets that they can use to back their own agenda," adds Mr. Roy. "It sounds somewhat similar to our situation in the US."

David Shambaugh, a China specialist at George Washington University, who wrote a book on the adaptability of the Chinese Communist party, believes that over the past three years, there has been a "period of retrogression, where the system cannot seem to take the initiative".

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He questions whether the next-generation leaders will be able to introduce substantial changes in the face of opposition from state-owned companies, the People's Liberation Army, local officials and the government bureaucracy.

"The system is becoming fragile, sclerotic, atrophying," he says. "It is showing some the classic signs of dynastic decline."

Jon Huntsman, US ambassador to China from 2009 to 2011, spent considerable time with some of the new generation of Chinese leaders. He describes Xi Jinping, the man expected to become president, as being "comfortable in his own skin", "confident" and "engaging". This strikes a contrast with Mr. Hu, with whom US officials have sometimes had a more distant, even frosty, relationship.

"He is a pragmatist who knows very well how to work the system, the PLA, the princelings and the party," says Mr. Huntsman.

But the Chinese-speaking former Republican presidential hopeful believes that within two to three years, Mr. Xi will face significant pressure from a fast-changing society to set out a political reform agenda. "If people do not see a game plan being laid out, then the temperature is really going to rise sharply," he says.

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After three years in which Chinese foreign policy has often been more assertive than in the past, observers are also looking for clues as to whether the new leadership will bring a different view of how China should deal with the rest of the world.

Christopher Johnson, a former CIA analyst now at the Center for Strategic and International Studies in Washington, says the "new generation of Chinese leaders are certainly more cosmopolitan, but they are also more confident". He cautions that they will face an early challenge if territorial disputes with Japanover the disputed Senkaku Islands or in the South China Sea continue to flare up, because they would need to show their domestic audience that they are not going to be easily pushed around.

"They will just be settling in when this might come back – they will be in a position where they have to demonstrate their credibility," he says.