The Rise of China's Reformers?

Why Economic Change Could Come Sooner Than You Think

With China’s political transition now complete, the country -- and the world economy -- is left with a pressing question: Does the new team in Beijing have the vision and the political will to revive stalled yet crucial economic reforms? Few observers are optimistic about the answer.

A growing chorus of pessimists, in China and elsewhere, has coalesced around three central arguments. The first group, call them the “economic cynics,” argues that the bar for reform is just too high. This is because several underlying economic problems, including a real estate bubble, have worsened at precisely the moment that China’s economic growth has slowed. Chinese officials’ traditional solution to economic slowdowns -- accelerating exports -- has become harder in light of declining demand in advanced industrial countries.

What is more, these pessimists argue, even if China’s new leaders want to undertake bold reforms, economic problems have become so dire that they will overwhelm the new team’s ability to forge consensus around a fresh approach. According to China’s National Audit Office, for example, provincial, county, prefectural, and municipal governments are some 11 trillion yuan ($1.8 trillion) in debt. This problem could lead to another round of exploding bad loans that would constrain the banking sector and forestall financial sector reforms.

The second group, call them the “social doomsayers,” argues that bad policies and poor governance are fueling unprecedented social unrest -- with more than 100,000 protests taking place each year by some estimates. This group insists that since preserving political stability is Beijing’s top priority, the government will avoid undertaking reforms that risk short-term economic dislocation and might further exacerbate social discontent.

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