Is China Up to the Challenge?

China ended the suspense last week by announcing its new leadership headed by Xi Jinping to the nation and the world. While the Communist Party and Central Military Commission elites are now identified, we must wait until March for a clearer idea of the policy orientations of China’s new elite, when the National People’s Congress will appoint ministers of State Council and other government officials.

But it is not premature to identify their main challenges and speculate about how the leaders may respond. There exists a surprisingly strong consensus inside and outside of China on the principal problems and what reforms are needed. They essentially constitute significantly relaxing state and party control and allowing private sector and civil society greater leeway, while redirecting resources to spurring innovation and reducing social inequities. Specifically, urgent tasks include:

• reorienting the economic growth model away from investments into physical infrastructure and subsidized exports to one driven by domestic consumption and innovation, emphasizing the knowledge economy and service industries;

• breaking the government’s monopoly over several sectors, while empowering civil society and loosening controls over the media, so as to facilitate the free flow of information needed in a real market economy and innovation society;

• adequately resourcing “public goods” for the populace – including healthcare, environmental protection, improved quality of education, pensions, old age care – while seriously addressing social stratification and inequity;

• instituting the real rule of law – so as to counter rampant corruption, rising crime, systemic abuse of privilege and power, and facilitate the predictable functioning of a market economy; addressing seething discontent among ethnic groups in Tibet and Xinjiang in positive ways instead of relying on intimidation and repression;

• permitting greater political pluralism, even within a one-party system.

In the foreign-policy arena, China’s neighbors hope it will adopt a more accommodating and less confrontational posture, particularly over maritime territorial disputes. Beijing also needs to work with the United States to stem the strategic competition and mistrust now pervasive in the relationship. Its relations elsewhere in the world are increasingly afflicted by the growing perception of China as a mercantilist state soaking up natural resources and investing in strategic assets. China also needs to play a greater role in global governance commensurate with its power and position in the international community.

Inside and outside of China there exists a common recognition that the country has reached a threshold in its development in which the broad programs and policies of the past 30 years are producing diminishing returns and qualitatively new directions and reforms are needed. Will the new “fifth generation” leadership embrace the needed radical reforms? While one always hopes that new leaders bring fresh perspectives and policies, four factors caution more prudent expectations.

The first is what political scientists refer to as “path dependency” – a state’s addiction to its existing path. It is very difficult to change the macro direction and orientation of state policies – particularly if its growth model has produced such extraordinary results as has China’s over the past three decades. This growth model has not only produced impressive national development – it has also employed a huge relatively unskilled workforce. To transition away from this model risks widespread unemployment and labor unrest, which would threaten social stability and party rule.

To be sure, China does not need to jettison its export economy or domestic infrastructure construction, but it does need to adjust both. The composition of its exports needs to move up the value chain – and this is linked to shifting investment from “hard” to “soft” infrastructure: education, science, cutting-edge technologies, innovation and cultural creativity. For China to make these transitions requires more than a shift in financial allocations, though, as it requires loosening of the political system, media censorship and civil society. A “knowledge economy” cannot easily be built in an authoritarian system.

This leads to the second inhibiting factor: the Soviet shadow. The Chinese Communist Party is profoundly conscious of the factors that led to the collapse of the Soviet Union and its former satellite states in Eastern Europe. More recently, it has nervously watched and assiduously studied the “color revolutions” across Eurasia and the Arab Spring. The party is petrified about the possibility of a repeat in China, and is of the view (to quote Mao) that “a single spark starts a prairie fire.”

They fear that taking even initial steps towards opening the political system to genuine pluralism, empowering civil society, loosening media censorship, permitting free inquiry and critical thinking in education and research, or making the legislative and judicial systems autonomous of party control, would inevitable cascade out of control and spell the demise of party rule.

In discussions and publications, many party intellectuals recognize that these reforms are needed, but Communist Party conservatives are of no mind to permit them.

The third obstacle is institutionalized interests. China may not be a democracy, but it certainly has strong vested interest groups and bureaucratic politics. It is natural that those in any system possessing wealth, resources, power and privilege are not about to voluntarily surrender them—and they will use all available means to sabotage attempts to undermine them. In the case of China, to attack these vested interests that distort the system is to attack the very system. The Chinese Communist party-state is not about to destroy itself.

The core problem is the state sector of the economy, which still accounts for roughly 30 percent of GDP. This includes state monopolies of the banking, energy, finance, defense, heavy industrial, aerospace, telecommunications, and much of the transportation sectors, as well as enormous swaths of land and property owned by the party, state and military.

Lenin warned of “state-monopoly capitalism” in 1917 – China has it in spades today. These vested interests, particularly the 145,000 state enterprises and 120 “national champion” corporations, are not about to divest their interests voluntarily.

Aside from the state monopolies, three other entrenched interest groups inhibit reforms: the military, the sprawling internal security apparatus and the arch-conservative wing of the Communist Party. Taken together, this “iron quadrangle” of key and well-resourced actors succeeded in commandeering the outgoing Hu Jintao administration. Even if Xi Jinping and the new leadership wished to loosen or break the chokehold that these interest groups exert in China, they would encounter stiff and insurmountable resistance.

The fourth obstacle to reforming China’s relations with its neighbors and the western world lies in its aggrieved nationalism and entrenched national narrative of victimization. This narrative, assiduously developed over six decades through the propaganda and educational systems, underpins the political raison d’etre of the Communist Party – but it is a core source of the frictions with China’s neighbors and the West. China needs to shed this psychological baggage to truly normalize relations with Asia and the West – but to do so is to undercut the party’s legitimacy.

Because of these obstacles, as well as the sheer totality and complexity of the problems and policy challenges, I am not optimistic that China’s new leadership can undertake the reforms needed for improving domestic society and its foreign relations. Thus, the world should expect more acute problems at home and more frictions abroad.

(The author is professor and director of the China Policy Program in the Elliott School of International Affairs at George Washington University, and nonresident senior fellow.)