China must reform or risk crisis, experts warn new leader

By Chris Buckley

BEIJING, Oct 8 (Reuters) - China risks economic malaise,deepening unrest and ultimately even a crisis that could shakethe Communist Party's grip on power unless its next leader, XiJinping, pushes through stalled reforms, experts close to thegovernment have warned.

The warnings, striking for their openly urgent tone, havebeen aired both inside the party and publicly, and reflect aninternal debate about the direction of the new leadership thattakes power next month.

"There is a potential crisis in China's model of economicgrowth," said a paper from Strategy and Reform, one of severalthink tanks and groups that throughout this year have pliedofficials with blueprints for Xi's coming decade in power.

"The next decade might be the last opportunity for activelypursuing reform, and we should treasure this last chance," saidthe paper released on the group's website ().

"China is confronting a perilous jump, one that it canneither hide from nor avoid no matter what," said the paper fromthe group, which includes academics, company executives,government policy-advisers and some officials.

China heads into next month's party congress - where Xi isset to take over from Hu Jintao as top leader - with the economyheading for its slowest annual growth rate in at least 13 years,while social stresses, such as ire over corruption, land grabsand unmet welfare demands have stirred protests.

"China's economic and social contradictions seem to benearing a threshold," prominent Chinese economist Wu Jingliansaid in a recent interview with Caijing business magazine.

Advocates of reform are pressing Xi to cut back theprivileges of state-owned firms, make it easier for ruralmigrants to settle permanently in cities, fix a fiscal systemthat encourages local governments to live off landexpropriations and, above all, tether the powers of a state thatthey say risks suffocating growth and fanning discontent.

Most party-linked proponents said in interviews with Reutersthat political reform must start at the grassroots and beincremental; they called outright democracy a distant orunrealistic idea.

"You can't solve all of these problems in a decade, but youcan address the reforms urgently needed by ordinary people andshow that you're heading in the right direction," said DengYuwen, an editor at the Study Times, a newspaper published bythe Central Party School which trains rising officials.

He recently shot to prominence after publishing an essaylamenting the lost chances for reform under President Hu andPremier Wen Jiabao. He said their successors must move faster.

"The next two or three years, and at most the next politicalcycle, will be a crucial period for China's development," Dengwrote in a new Chinese-language book on the theme.


Although China's economy remains relatively robust -- itgrew 7.6 percent in the second quarter -- advocates of reformsay their worries are about longer-term prospects.

The party's recent unity behind a decision to punishdisgraced politician Bo Xilai has kindled hopes among some thatXi (pronounced "Shee") can build similar accord for bolderreforms.

Xi is aware of the calls, said experts and party insiders.But heeding them will require him to take on economic andpolitical blocs with a powerful hold over policy.

"Does the new leadership recognize that they're reaching akey inflection point in their economic and political path? Ithink the answer is yes. But the other question is: Do they havethe courage to act boldly on those problems," said ChristopherJohnson, a specialist on China at the Center for Strategic andInternational Studies in Washington D.C.

"The question is whether the system has become so scleroticthat they won't be able to get anything done," said Johnson, whoonce worked as a China analyst for the Central IntelligenceAgency.

Past leadership transitions in China have also kindled hopesfor big change, including some political liberalisation.

Before President Hu Jintao came to power in late 2002, hefaced calls for ambitious change, and some analysts andreporters saw in him the makings of a bold innovator. Thosehopes foundered as Hu proved to be a cautious conformist, andsome are now wary of investing such expectations in Xi.

Yet the expectations for reform are louder and more urgentthan when Hu took power, said several experts. If it is wrong topile high hopes upon Xi, it is also wrong to regard him as areplica of his predecessors, some said.

"Before each congress, there's always a debate, but it feelssharper this time," said Zhang Jianjing, editor of "ChinaReform" magazine, which has advocated pro-market policies andusing the law to curb state power.

"There's a deeper sense of anxiety now that goes beyondspecific issues. There is a widespread sense of foreboding,"said Zhang, a journalist who has followed four party congresses.


Many economists believe that without transformation, China'sgrowth by the end of this decade will be nearer 5 percent a yearthan the roughly 10 percent annual expansion achieved in thedecades after Deng Xiaoping launched reforms in 1978.

China can achieve another two decades of annual growth ofabout 8 percent if it implements the right policies, accordingto Peking University professor Justin Lin, who was the WorldBank's chief economist until earlier this year.

Xi's "princeling" pedigree - as the son of a party leaderwho served alongside Mao Zedong - could make him morecomfortable in wielding power than Hu and Premier Wen Jiabao,with their more humble backgrounds and ways.

Xi's extensive experience as an official in wealthy coastalprovinces powered by private business also might make him moreopen to pro-market change, the pro-reform advocates added.

China's present leaders have "lacked political imaginationand seen themselves as operating a machine", said Yao Zhongqiu,president of the Unirule Institute of Economics, a privately runthink tank in Beijing that advocates free market policies. "Butthe next generation has a quite different temperament."

Since Xi, 59, was anointed Hu's presumptive successor in2007, he has mostly refused to spell out his ideas - necessaryfor survival in Chinese politics where deference to theincumbent leader is expected.

But recently, Xi hinted that he understands the calls forhim to take a bolder path, even if he wants to also put to restany expectations he will seek a radical change.

In a talk with Hu Deping, son of the late reformist leaderHu Yaobang, Xi said he favoured steady reform.

Signs the party leadership wants to trim the PolitburoStanding Committee - the core of party power - from nine toseven members also appear to reflect a desire for more agilepolicy-setting.

The list of those new Standing Committee members will not beannounced until the end of the party congress, when Xi is likelyto be named party general secretary. He will be named statepresident at a parliament session likely to convene in March.

Yet even if Xi wins a leadership lineup sympathetic to abolder agenda, he faces the obstacle of pushing changes pastpowerful state sectors and state-owned conglomerates that haveenjoyed privileged access to credit and opportunities.

He might also have to accommodate two retired leaders, Huand his predecessor Jiang Zemin, who are likely to demand a sayin big policy changes. That could make for unwieldy compromisesbogging down change, said some advocates of reform.

"There's never been a situation like this with threebosses," said Yao, the president of the Unirule institute,referring to Xi, Hu and Jiang.

"There will be a mismatch between social expectations andthe political structure. But if expectations (for reform) aredisappointed again, the ramifications will be more serious thanbefore, and it will be very difficult for Xi."

(Reporting by Chris Buckley; Editing by Mark Bendeich and RajuGopalakrishnan)