China at a Turning Point as New Leadership Takes Over

Americans have just voted on who will govern them for the next four years, now China is poised to usher in a new generation of leaders that will rule the world's second largest economy for the next 10 years.

China's Communist Party, which has ruled the world's most populous nation since 1949, starts its 18th National Congress on November 8 and is expected to unveil a new line-up of leaders when the gathering ends next week.

The once-in-a-decade political transition is arguably more significant than the U.S. presidential election, some observers say.

Here's why: China's emergence as an economic powerhouse means that what happens in its domestic politics has the potential to shape economic policy, which in turn has global implications.

And this transition is particularly important as it comes at a time of huge change – growing resentment at corruption and vested interests, highlighted by the Bo Xilai scandal, labor disputes that are on the rise and fears about where China is heading as the economy slows after three decades of rapid growth.

"The political transition is important not only because of China's growing presence in the world economy, but also because of the power the Chinese government has to shape its economy," said Justin Harper, Market Strategist at IG Markets in Singapore.

"Say in the U.S. or the UK, you get a change of leaders, broadly speaking that does not tend to have a big impact on the economy. That's not the case in China, where the government wields so much power a change in leadership really can have a big impact on the direction of the economy," he said.

Political observers cite another reason for the significance of China's leadership change – a level of change in its policy making body that is unprecedented.

The Communist Party sets strict age limits for its leaders and seven out of the nine current members of the all-powerful Politburo Standing Committee, the party's ruling body, are expected to step down.

Xi Jinping, currently the vice-president, and Li Keqiang, currently the vice-premier, are tipped to become China's next president and premier respectively, taking over from President Hu Jintao and Vice President Wen Jiabao.

The make-up of the rest of the standing committee is a mystery. Just two months ago, Xi went absent for two weeks, yet Beijing remained silent even as rumors about the health of China's next leader swirled, highlighting the secrecy that shrouds political leaders despite the rise of China as a dynamic, modern economy.

"China's leaders are noted for their secrecy," said Jonathan Fenby, a writer and commentator with expertise on Chinese affairs. "The world's last major state ruled by a communist party does not go in for the kind of public political contest (played) out in the United States ahead of the presidential election."

(Read More: China's New Leaders—the Line-Up)


The focus for markets is what action the new leadership will take on the economy, which is expected to grow this year at around 7.5 percent – a level that would mark the slowest annual pace in 13 years and a sharp slowdown from the double-digit growth rates China has enjoyed in recent years.

Hopes are high that once the political transition is over, Beijing will step in with stimulus measures to help growth and support Shanghai's beleaguered stock market, which has declined some 35 percent over the past three years.

Beijing has cut interest rates twice this year and stepped in recently with small economic measures such as infrastructure projects. However, it has steered clear of the massive spending unleashed four years ago to protect the economy from the global crisis. That spending, worth $586 billion or 14 percent of GDP, has been blamed for problems such as inflation and over investment in housing.

"The government has been helping growth on the monetary and fiscal side but they are not interested in an all-out stimulus plan. The policies have been the way they are because the government feels comfortable with how the economy is doing," Louis Kuijis, chief China economist at Royal Bank of Scotland in Hong Kong told CNBC.

"On the reform side, it is going to be interesting to see where the emphasis will lay," he added.

For many China watchers, it is the direction and pace of economic reforms that will be the main focus since these will determine whether or not China's economy, which has grown at an average rate of 10 percent over past 30 years, can now move onto more sustainable path.

"It's always difficult to see what China's game plan will be and interpret what the government will do," said Harper. "So that means there is some uncertainty about the direction of the economy."

- By CNBC's Dhara Ranasinghe; Follow her on Twitter: @Dhara CNBC