China is facing fresh international demands to loosen its grip over its economy, highlighted by a recent World Bank report calling into question the country's growth model. At the same time, China is in the midst of a once-a-decade Communist Party leadership transition that has fueled domestic pressure for political reforms. For China to maintain its current growth trajectory, it must "revive economic reform and start political change," says Minxin Pei, a China expert at Claremont McKenna College. But, he adds, there is currently a rift within the party, as the recent sacking of Chinese leader Bo Xilai demonstrates. "The rift is over power, not necessarily over ideology," he explains. "From the party's point of view, they want unity." It is therefore difficult to predict whether the party will implement significant reforms when new leaders come to power, Pei argues.
The World Bank came out with a new report in conjunction with China's Development Research Center, calling China's current economic model unsustainable. How significant is this report, and what are the main takeaways?
That report is a very significant argument. It's a very careful analysis of the challenges China faces ahead in sustaining its economy and avoiding the so-called middle-income trap. The main takeaway is that China's fundamentals are strong, but these fundamentals alone cannot take China to the next level. China will have to implement a set of very tough structural [and] institutional reforms. What is new about the World Bank's report is that it has lent its own political authority [and] technical expertise to this point of view. And the fact that its partner is a research center of the State Council, that the report reflects the views of quite a few people inside the Chinese bureaucracy, [is significant].
What are some of those structural and institutional reforms that need to be made?
The point is that the state has to progressively withdraw from the economy, because the state sector remains too strong, draining too many resources in China, and it distorts the market.
The state has to progressively withdraw from the economy because the state sector remains too strong, draining too many resources in China, and it distorts the market. Another [piece of] advice is that China will need to increase its investment in social services--practically double its current social standing in order to strengthen its human capital stock and improve the environment. And China needs to encourage innovation. China also has to invest in new technology--special green technology--to reduce the pressure on the environment. [The World Bank] also asked the Chinese government to reform its public finance sector, because right now the public finance sector is too heavily skewed toward the central government.
Within the Chinese leadership, what is the appetite for reforms, both economic and political?
Nobody knows. It is a very sensitive period in China, and typically on the eve of transition, leaders would like to keep their cards close to their chest. They don't want people to know what they are really up to, because if they are going to implement some of those reforms, the interest groups who will be hurt by these reforms will be opposed. So leaders are understandably very cagey about their intentions.
The rhetoric is definitely heating up, the rhetoric about reform. I've not seen something like this for a long, long time. The urgency attached to reform is much stronger. Leaders talk more about reform, the press talks more about reform, even the intelligentsia--China's punditry--talks more about reform. So the intellectual pressure and the media pressure are building. But the official response so far is rather muted, other than rhetoric.
The Chinese Communist Party leadership last week fired rising star Bo Xilai, the party chief of Chongqing. How was this move significant?
It shows there is a rift within the party. And the rift is over power, not necessarily over ideology, even though the guy may be a leftist. From the party's point of view, they want unity, they want stability. In their eyes, someone like Bo can undermine unity and stability. That's why they decided to get rid of him. But whether getting rid of him will bring in somebody who can change direction in the party, nobody knows.
Outgoing Chinese Premier Wen Jiabao recently called for structural political reforms to eliminate the remaining excesses of Mao's Cultural Revolution. How do you read his comments?
The premier, in terms of rhetoric, did not depart from what he has been saying all along. What is notable is whether the premier is saying this all by himself, or his senior colleagues were saying the same thing. And this time, he was saying it all by himself. His other colleagues did not follow him. And that shows that, probably, he is not expressing the collective voice of the Communist party. That means that, probably, you're not going to see real reform in the short term.
When it comes to what future leaders in China will do, nobody knows. Even future leaders themselves do not know. Because it all depends on what kind of lineup they have at the top level of the Communist Party leadership.
In terms of U.S.-China relations, what do both sides need to do to resolve some of their bilateral tensions and disputes, including those over currency and trade issues?
Currency and trade issues are easy to resolve because these are business decisions. If you look at the numbers today, they are better than they used to be, so the market forces do have a role to play. If China continues with an economic policy [that] hurts its growth, employment, efficiency, economic well-being, that policy will be changed. I'm much more worried about strategic conflict, security conflict. Because that's about fear; that's about distrust; that's about status--much more difficult to resolve than issues of price.
What are the major strategic issues?
China's military modernization, America's deployment in East Asia, the U.S. pivot toward East Asia--all of these things.
What do you see as challenging the relationship most in the coming years?
One is this relative decline of the United States--that the gap between the U.S. and China continues to shrink. That can create overconfidence on the part of China, and insecurity on the part of the U.S., and that's a very dangerous dynamic. The other is the intensifying ideological conflict--that China represents a one-party state capitalist model; the U.S. represents a liberal, democratic model. The ideological conflict between these two models can cloud the relationship and makes it very difficult for the leaders on both sides to trust each other.
Looking forward, what does China need to do to maintain a strong trajectory and remain an important world power?
If China doesn't do anything, if it simply coasts along, China's growth is not sustainable. That means the current political system will not be sustainable.
China is so far not a dominant power. It's a rising power; it's very influential in the world. The U.S. is the dominant power, the only dominant power, across a wide range of areas. What China needs to do in order to maintain its current trajectory is to revive economic reform and start political change. Because if China doesn't do anything, if it simply coasts along, as the World Bank report has warned, China's growth is not sustainable. That means the current political system will not be sustainable. There will be no social stability in China either. For China, reviving reform, not just economic, but also political, is its most urgent task.