BEIJING—This Saturday, Chinese President Xi Jinping will launch what is being billed as the most important conclave of Chinese leaders since 1978, the year that Deng Xiaoping transformed China from a dying Red giant into a market-driven dynamo. (“Seek truth from facts,” rather than communist ideology, he said.) The historic “Third Plenum” of Xi's term is meant to signal that he has consolidated power, decided on a direction for the country, and achieved consensus with the political class. Xi, a pragmatic, worldly apparatchik who likes to reminisce about the happy sabbatical he spent in Iowa as an agriculture student, is by all accounts immensely popular with the people, though of course true political polling doesn't exist in this still-censored country.
Although China's growth has stumbled this year in tandem with the global slowdown, Xi's ambitious reform agenda hopes to power its continued rise. China is already the world's second-biggest economy, after the United States; its purchasing power, as it shifts from a producing economy to a consuming economy, commands deference across the world. Xi pledges an economic and political transformation to weaken special-interest groups—including big, slow-moving state-owned enterprises, corrupt officials, huge bureaucracies, and kleptocratic local governments—that have acted recently as a drag on the country's otherwise remarkable economic ascent.
“They're riding a tiger, and they don't know how to get off.”
China's apotheosis, in other words, seems unstoppable. When the Pew Research Center surveyed 38,000 people in 39 countries over the summer, it found that the vast majority “believe the global balance of power is shifting ... China's economic power is on the rise, and many think it will eventually supplant the United States as the world's dominant superpower.” In Washington, the Obama administration has touted a “pivot” of U.S. interests to Asia that Beijing believes is intended to counter its ascent.
Yet there are just as many signs today that China is in deep trouble. America and the rest of the world should be less concerned about a rising China than about a sputtering—or even a crashing—China that could someday turn the world economy's greatest growth center into a global albatross.
Start with this week's confab, the third time Xi will lead a plenary session of the Central Committee. Despite all the triumphal talk, it is less a coronation than a reckoning. Leaders, starting with Xi, have come to realize that as China's economy matures, its get-rich-quick machine is slowing down. This year, the economy is set to grow at 7.5 percent, its slackest pace in 23 years—a dream for any other economy (and more than twice the rate in the United States and Japan) but a sign of danger here.
As the film of smog reminds big-city residents several times a week, growth has come at a cost. Mounds of debt, from municipalities (which owe $3.1 trillion) on up, dog the country, as does a declining private-sector cash flow; a real-estate bubble fed by a growing and scary “shadow banking system” that China's own regulators have likened to a Ponzi scheme; and a raft of looming Communist Party power skirmishes. So the government can't simply stoke the flame: “We are making too many bubbles if we keep stimulating the economy,” says one high-ranking party official who asked to remain anonymous. “A slowdown is inevitable. When you look at productivity, you can see that the way we were producing GDP was not always healthy.”
Already, China may be stumbling toward a precipice. “The real economy is slowing; the speculative economy is growing,” says Patrick Chovanec, an asset-management strategist based in Asia and a former professor at Tsinghua University's School of Economics and Management in Beijing. “They're riding a tiger, and they don't know how to get off ... China is well along the process of a hard landing.”
Economists and China hands increasingly say the nation needs political reform—the freedoms that will spark an innovative rather than imitative economy, and a legal system that will enforce the rule of law, critical to a developed economy. (How long will citizens trade the right to political self-expression for economic enrichment, they wonder?) Yet 35 years after Deng's historic plenum, the sclerotic authoritarianism left over from a bygone era may not prove supple enough to master the challenge. It's more than a decade since China joined the World Trade Organization, but the rule of law is still not a priority, and the system of accountability is a running joke around the world. The richest top 50 Chinese politicians have amassed some $95 billion in wealth, nearly 100 times more than the collective assets of the 50 wealthiest members of the U.S. Congress, The Economist reported. “You've taken an extant model as far as it can go,” says Jonathan Pollack of the Brookings Institution. “Therefore, unless there is political will to shape different kinds of outcomes, then we may be dealing with much more troubled economic performance.”
Other problems: The ever-worsening environment regularly shuts down cities as officials scramble to reverse the darkness-at-noon phenomenon. The birth rate, thanks to the one-child policy (which Beijing is expected to relax soon), is just 1.58 births per woman—a looming demographic time bomb. Pension assets are only about 1 percent of gross domestic product, compared with around 70 percent in the United States, meaning people will be less willing to take risks and the burden of support will fall on a smaller, younger generation. “The Chinese people are worried they will be old before they are rich,” says Victor K. Fung, chairman of the Fung Global Institute in Hong Kong.