Reform With Zeal—Can China’s New Leadership Deliver?

A political scandal, a newspaper report claiming the family of China's premier had amassed billions of dollars, a slowing economy and a territorial dispute with a major trading partner — not the backdrop China's leadership would have hoped for heading into a significant once-in-a-decade political transition.

Yet, China's new generation of leaders will be defined not by the problems they inherit, but by whether they will have enough zeal to deliver reforms to keep Asia's largest economy on a sustainable growth path, China watchers say.

About 70 percent of China's top leadership positions are expected to change during the ruling Communist Party's Congress that starts on November 8, an event that has taken on huge importance.

It's not difficult to see why—China's economic transformation has astounded the world, with the country becoming the world's second biggest economy in 2010 from fifth place in 2002, and tipped to surpass the U.S. as the largest by 2020.

(Read More: China Cabinet Seeks Ambitious Economic Reform Agenda)

China's rise as an economic super power means what happens in domestic politics will be followed as closely abroad as it is at home.

"There is a lot of talk surrounding the new generation of leaders and the need to be bold with economic and political reform," said Patrick Chovanec, associate professor at Tsinghua University. "We have to see how that translates into reality."

A need to reform China's economy—poised to grow at its slowest annual pace in 13 years this year—by partly reducing a reliance on the export sector and increasing consumption at home is something the government has talked about before.

But analysts say significant reforms have been slow as the Chinese government has veered towards maintaining rapid economic growth to create enough jobs for the 1.3 billion population and keep unrest at bay.

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 scaling back state-owned enterprises.

Yet, there are some signs that a push for reforms is growing.

In its strongest hint yet that it will move in the direction of reform, the Communist Party dropped a once standard reference to former leader Mao Zedong in statements ahead of the leadership change.

A recent report by Reuters said China's leaders have asked policy think tanks to produce ambitious economic reform plans that may cut the power of state-owned firms that enjoy huge privileges such as preferential access to bank loans and government contracts.

(Read More: China Power Brokers Make a Wish List of Leaders)

Another area of reform that might be on the agenda is the liberalization of capital markets, including boosting the use of the tightly-controlled yuan in global trade settlement.

"There appears to be lots of momentum for reforms of the financial sector, interest rate setting and lots of other reforms put forward by think tanks that involve reducing government involvement. That will continue, and that will be the medium-term picture," said Moody's Analytics economist Alistair Chan.

"Also, if you look at the reports, rumors about the upcoming leadership, it looks like we will get more reformists at the top," he said.

Vice President Xi Jinping is tipped to take over from President Hu Jintao in the handover of power, and Vice Premier Li Keqiang is expected to become China's next premier. The make-up of other key posts is unclear.

Reform With Zeal—Can China’s New Leadership Deliver?
Getty Images

According to Chan, the removal of politician Bo Xilai from power may help spur reform.

Bo, one of China's most well-known politicians who fell from grace earlier this year after a close aide disclosed that Bo's wife had murdered a British businessman, was associated with increased state control.

"With the sacking of Bo, the reformists seem to have gained the upper hand. There is an opportunity here and I think they will use it," said Chan.

Reforms, but When?

Some analysts say the new leadership team could take a softly-softly approach to reforms, especially since it will have its hands full with a host of issues such as a territorial spat with Japan and pressure to deliver immediate monetary and fiscal stimulus to shore up the economy.

"In most leadership changes, the leaders have taken at least 2-3 years before they get enough control of the economy, over the people around them, the leadership team, to make a big difference," David Zweig, director of the center on China's transnational relations at the Hong Kong University of Science and Technology told CNBC's 'Worldwide Exchange' last month.

Geoff Lewis, global market strategist at JP Morgan Asset Management agrees.

"It would be going against the grain of the current government if we suddenly see a strong aggressive move towards new reforms. The whole character of the Chinese administration under (Premier) Wen Jiabao and Hu Jintao has been incremental and one foot on the brake with regards to opening up the economy," he told CNBC.

The problem, say analysts, is that China cannot afford to delay economic reforms given the pressures facing the economy.

(Read More: China Must Reform or Risk Crisis, Experts Warn )

"There is an established pattern that new standing committees coming in push through some early reforms; and that would be a good thing because China faces a complex number of challenges which need to be addressed with increasing urgency," Alistair Newton, senior political analyst at Nomura told CNBC. "So I hope we see some fairly quick reforms when the new leadership is in place."

The fear of social unrest could be another impetus for economic and political reforms, analysts said.

China does not need to look too far back into the past to be reminded of how economic discontent can bubble over into unrest at home – strikes have become increasingly frequent in recent years at private owned factories, with a strike in an industrial zone near Chengdu, in south-west China, grabbing the headlines in January. Plans to expand a petrochemical plan in eastern China meanwhile were shelved last month after days of protests.

In short, China's new generation of leaders may not have much time to act.

"China's economy has slowed faster than expected and this is leading to serious pressures on the financial sector," said Chovanec.

(Read More: China Making Slow, Steady Economic Recovery: Report)

"There are mounting pressures and they have some immediate issues they have to deal with and some tough choices to make from day one," he added.

- By CNBC's Dhara Ranasinghe