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Will China’s New Leaders Walk Their Talk on Reforms?

Dhara Ranasinghe | Senior Writer, CNBC Asia-Pacific
Tuesday, 27 Nov 2012 | 4:02 AM ET

It has only been two weeks since China revealed its lineup of new leaders and Beijing has already started making the right noises about economic reforms. But the question China watchers are asking is whether the new team will actually walk its talk.

Last week China's current vice premier and next premier Li Keqiang was quoted as saying China needs to accelerate an overhaul of its economy, improving state-owned firms and the taxation system.

Plus last Friday local media reported that the Chinese province of Wenzhou is pressing ahead with a closely-watched pilot project that aims to formalize private lending in order to reduce financial risks.

"The new leaders are making the right noises on the need for economic reforms, but I'm not sure if they fully realize the sense of urgency," said Patrick Chovanec, associate professor at Tsinghua University in Beijing.

"The real issue is not the rhetoric but implementation and whether or not we will see action on the economy," he added.

China unveiled the members of its top decision-making body at a congress of the ruling Communist Party earlier this month, appointing Xi Jinping and Li Keqiang to become China's president and premier, respectively, as of next March. The new leaders will govern China for the next decade.

(Read More: Why China's New Conservative Leaders Will Be Reformists)

Country analysts said China, the world's second-largest economy, needs to deliver both economic and financial reforms to keep growth on a sustainable path, although many expect the pace of reforms to be slow as the new leadership team takes its time to find its feet.

The World Bank and Chinese government researchers warned earlier this year that China could face an economic crisis within 20 years if it did not overhaul its development model and implement changes such as scaling back state-owned enterprises.

(Read More: Reform With Zeal — Chan China's New Leadership Deliver?)

The Wenzhou Experiment

Still, analysts said there are signs to be hopeful about the scope for reform once the transition to a new generation of leaders is completed next March.

According to a report in the China Securities Journal last week, the Chinese city of Wenzhou will draw up details of a trial that will allow direct overseas investments in yuan.

Already approved by China's State Council, this is a significant step by Beijing to open up China's financial system, analysts said.

"The Wenzhou experiment is a very good one that will allow Chinese private money to enter into the financial system," Liu Li-Gang, head of China Economic Research at ANZ told CNBC.

"At this moment, China's financial sector is pretty much dominated by the state sector. If we were to see more private entry into this sector, then we would see more lending to China's small-and-medium-sized enterprises and that would help the eventual rebalancing of the economy," he added.

According to Chovanec, one of the obstacles to implementing reforms such as reducing the role of state-owned firms in the economy is an expectation of increased state spending to boost an economy that slowed for seven-straight quarters.

"Within China and at a local government level, there are still hopes and expectations that the government will deliver a big stimulus package," he added. "This is something the new leadership needs to contend with."

Economic conditions, however, appear to be turning in favor of the new leadership team, with a recent string of upbeat economic data from China easing fears that the economy is heading for a sharp slowdown in growth or a "hard landing."

Data on Tuesday, for instance, showed profits earned by industrial companies in China jumped 20.5 percent in October from the previous year, accelerating from September's 7.8 percent gain and the latest sign of a pick-up in Chinese economic activity.

Richard Jerram, chief economist at Bank of Singapore, said markets may not have to wait too long to see whether a change at the top of China's leadership structure will translate into economic reforms, with a policy document due in December.

"We will get a policy document in December from Beijing and this should help set the agenda," he said. "The problem with short-term comments from leaders is that it is difficult to read much into these, so we will wait to see what's in that policy document."

- By CNBC's Dhara Ranasinghe.

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