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China's Challenge: How To Keep Economic Boom Alive

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How do you keep the world's longest economic win-streak alive?

That's the question China's leaders face at a meeting that opens Saturday in Beijing. The meeting, known as the Third Plenary Session of the 18th Communist Party of China Central Committee, is the most important of its kind in years, and for the planet's second-largest economy, a lot hangs in the balance.

In decades past, meetings like this have been game changers. Consider the one in 1978, when Deng Xiaoping officially shut the door on the chaotic Mao era.

"They said, 'The focus of our policy efforts should shift from political struggle to economic construction,' " recalls Barry Naughton, a professor at the University of California, San Diego, who has studied China's economy for more than three decades. "That was so fundamental. It was used to drive a range of policies across the board."

It also set the stage for China's transformation from totalitarian basket case to economic powerhouse. Naughton says the question now is whether China's leaders have the resolve to take on powerful interest groups and make the necessary reforms to keep the country's economy on track.

"If they don't deliver on economic reform," says Naughton, who is currently at Beijing's Tsinghua University doing research, "I think they basically lose credibility to a very substantial degree."

China's economy is at a turning point.

The old model of low-wage labor, cheap exports and heavy investment in things like roads is running out of steam. To keep growth going at a good pace, the country's leaders say the economy must become more efficient and rely more on Chinese people buying Chinese products and services.

Rothman says one way to do that is to change the country's restrictive residency system that denies urban rights to rural migrants. Reform would allow migrants — who built China's modern cities – to live in them, permanently. They would enjoy government benefits, more security and probably be more willing to spend money and drive the economy.

Rothman expects the government to head in this direction.

"Next year, they'll start rolling out gradually a program to end the legalized discrimination against the migrant workers," he says. "This means treating them the same as people with an urban residence permit in terms of things like health care and education."

Rothman says the government hasn't treated them the same because giving 300 million migrants equal access to social benefits is hugely expensive. There are also vested interests against it.

"If you talk to people here in Shanghai and ask them, 'Do you think it's fair to discriminate against these migrant workers?' They'd say, 'Of course, not!' " Rothman says. "But then, when you remind them this might increase competition for school spaces, well, they get little bit nervous about that."

In fact, the reason it's so hard to push economic reform here is there are now so many powerful, vested interests opposed to it. Among them are China's state-owned enterprises, or SOEs, which enjoy monopolies in lucrative key industries, such as finance, telecoms and energy.

Gary Liu, executive deputy director of China Europe International Business School's Lujiazui Institute of International Finance in Shanghai, says those monopolies stifle innovation and competition.

But he adds that reducing the power of state-owned enterprises is tough, because so many people benefit from the current setup.

"The government officials, they find SOEs are a very convenient tool to make money for themselves, for their good friends and for their family members," says Liu. "So, if you want to change that, it is a big test for the political will of the leaders."

Liu is not optimistic about SOE reform and thinks its failure will disappoint many Chinese people, who often complain that SOE officials and employees enjoy high wages and overly generous benefits because of their government-granted monopolies.

"We all know that Chinese people — despite quick economic growth — we don't feel happy," says Liu. "Why? Because we don't feel [the current system is] fair. And SOEs are one key source of unfairness."

At the end of the four-day plenary session, economists expect China's leaders to release a vaguely worded report, which will call for broad economic reform, but within limits. After that, the Communist Party faces an even bigger challenge: Implementing its decisions.

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