What will China's new leaders do? Bold or incremental reforms?

Summary: China is one pole of the 21st century world. Skeptics have predicted China’s crash for over a decade. Even the IMF has began warming about China’s over-investments and shake banking system. Now a new generation of leadership take command. Much depends on their decisions, which will affect both China and the world.

Western experts believe China’s new leaders will act cautiously and conservatively on their major domestic programs:

they will prioritize steady strong economic growth over structural economic reform,
they will avoid potentially destabilizing (ie, large) political reform, hoping that steady economic growth maintains the Communist Party’s legitimacy.

Both of these goals seem unwise. The combination might be lethal for China.

China has long-deferred problems, and a window of strong growth in which to act. The alternative, so common in history, is to delay until an economic crisis forces action — under difficult circumstances. Most leaders believe that delay preserves options. False. Time inexorably closes more options than it opens.

Another scenario: China’s new leaders, who take office in March, act boldly to take advantage of the “new team” honeymoon. Political capital is usually strongest on day one, and tends to decline over time (ie, friends come and go; enemies accumulate).

However, even bold action might prove futile since these goals are contradictory.

Economic reform will almost certainly reduce growth, and might become economically or (even worse, and) political destabilizing.
Economic reform tends to become more painful the more slowly it’s implemented.
Economic reform might prove impossible without political reform that breaks the power of entrenched interest groups benefiting from the current order.

Simultaneous reform (political or economic) and rapid growth are rare in post-boom economies. Hence the many forecasts of stability in China — until they suffer an economic crash, a political crisis, or both.

The answer: what will they do?

China’s leaders have by now probably decided the answers to these questions. Few outside China’s small closed circle of senior elites know the answers.

Those confident articles in the western media? Like the cold war’s kremlinologists, today’s sinologists make confident guesses based upon little knowledge.

The wider context

China has outgrown its economic and political models. It remains politically stable and growing, but in an unsustainable fashion. Delay only increases the accumulated pressure and eventual cost of reform. But China has company. Japan. The EU. The USA. All have unsustainable economic models, with reform blocked by political rigidity. It’s the grand alignment of the nations.

There are no signs of reform anywhere among the major nations. The massive government monetary and fiscal stimulus programs keep the world running smoothly. The eventual reckoning will arrive unexpectedly, perhaps with interesting effects.

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