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China's President Charts Path For 'Comprehensive Reform' Amid Economic, Environmental Problems

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BEIJING -- China has a situation.

For three decades, the ruling Communist Party has pressed an effective formula in engineering an extraordinary economic transformation. The party lifted key state controls, enabling private businesses to take root. It invested heavily in highways, ports and other industrial infrastructure while courting foreign investment and handing out land for manufacturing operations. Chinese-made products landed on shelves around the globe, and inland farmers flocked to the coasts to take up new factory jobs, sending home wages that have sent children to school and purchased modern conveniences. In this fashion, some 600 million Chinese have been lifted from poverty.

But now that model has largely run its course, as China’s top officials acknowledged here repeatedly in recent days during a series of conversations at the 21st Century Council, a gathering of thought leaders, executives and former heads of state from around the world. I attended the conference, which was conducted in the name of furthering worldwide understanding of China.

Factory jobs are shifting to Bangladesh, Vietnam and other countries where wages are cheaper. Decades of industrialization have yielded staggering pollution, cloaking cities in noxious smog and funneling toxins into waterways. Local governments seeking to cash in on development have seized land from farmers without paying adequate compensation, provoking public outrage. Officials have exploited the boom as a corruption bonanza.

Economic inequality has widened to an extent not seen since the party took power in a peasant-led revolution more than six decades ago. An urban elite now enjoys climate-controlled high-rise apartments, shopping malls full of luxury brands and glittering restaurants. The rest of China’s 1.3 billion people contend with traffic jams, cough-inducing air and spiraling prices for housing, health care and education.

"In the past 30 years, no matter what kind of challenges we encounter, we have always placed development on the top of our agenda, and we have achieved an annual economic growth of 9.8 percent on average," Premier Li Keqiang told our gathering during a meeting in the Great Hall of the People, the grandiose home to China’s legislature. "That is what has brought China to where it is today."

"On the other hand, our economy is now faced with a series of deep-seated and structural problems," he continued. "There would not be sustainable development without economic transformation. Therefore, we have decided to build an upgraded version of the Chinese economy, focusing on improving the quality and efficiency of development. While growing the economy, the people's livelihood is our top concern."

Li’s words -- subsequently transmitted publicly in official state newspapers -- warrant particular scrutiny given a much-anticipated party plenum set to convene here this weekend. China-watchers have been anticipating the meeting as a potential milestone, suggesting that it could prepare the way for some of the most meaningful alterations to China’s economy since Deng Xiaoping unleashed the first market-embracing reforms in the late-1970s.

But if the broad outlines of an updated economic policy seem clear -- spread the benefits of development more evenly while diminishing pollution and social grievances -- the particulars are hardly so. As Chinese officials and influential academics discussed the challenges and potential prescriptions ahead of the plenum, they created the impression that the leadership is still grappling with substantial issues.

Such gatherings are not venues for the annunciation of detailed new policies. Rather, they function as pageants at which nuanced tweaks to familiar rhetoric convey a sense of the priorities to local governments tasked with implementing change. The proceedings are generally choreographed well in advance. But this time, say officials and academics affiliated with government organs, genuine debate appears to be continuing over significant questions -- not least, the fate of a proposed land reform that could effectively give rural people individual property rights.

While the state has allowed a frenetic property market to take shape in the cities, undergirding a real estate boom (and potential bubble), rural land remains officially under collective ownership and is controlled by local party chiefs who generally use it as they see fit. Giving rural people a legal claim on the soil they farm and live on has emerged as a potential means of impeding land grabs by corrupt local officials, at once easing a source of conflict and curbing environmental destruction. Land reform could also supply rural people a form of collateral for loans to set up businesses or raise funds to move to cities in pursuit of jobs.

Outsiders often assume that China is essentially devoid of politics, given the statues of Chairman Mao towering over public squares and the hammer and sickle still adorning party regalia. But despite one party rule, politics are a key dimension of decision-making. Special interests jockey for favor while party factions debate appropriate aims. On land reform, the jockeying and debating has been particularly intense.

Making land harder for developers to secure is likely to slow economic growth. That could jeopardize construction jobs for peasants streaming to cities -- a potential source of social instability. It would ding the finances of municipalities, which have come to rely on land sales for their sustenance, and diminish the bank accounts of local officials now raking in the spoils of development.

Moreover, realizing the merits of land reforms would all but certainly require another substantial change: liberalizing China’s so-called household registration system, which makes it difficult for rural people to legally establish themselves in cities. Once people are registered in urban areas, they qualify for subsidized health care, education and other social programs. The bill gets picked up by local governments, which -- not coincidentally -- generally oppose an easing of the strictures.

Yet unless rural people are able to move to cities, land reform could be a disaster in the reckoning of Chinese economists who are now lobbying against such a course. One economist in that camp frets that farmers could wind up selling their land and then failing to establish legal registration in the city. They would then be stuck with neither the means for a decent urban livelihood nor land to till in the countryside.

Party leaders inclined to this view see land as the ultimate social safety net in an era of tumultuous change. This notion underpins deep reluctance to turn it into a fungible commodity, even as many rural localities have already begun experimenting with land rights and mortgage markets.

Chinese leaders have long acknowledged an imperative to wean the economy from its dependence on exports and government-financed infrastructure while creating a new economic order centered on consumer spending. Chinese households are some of the more prodigious savers on earth, but much of this savings has been squandered on white elephant projects financed via sweetheart loans from state banks. Eventually, even the world's most populous country runs out of the need for more science parks, convention centers and urban makeovers. Its economic health will require that Chinese consumers have the means to buy Chinese-made goods and services.

Yet this transition cannot be achieved without still other reforms. Chinese households save in part because the old state social safety net has been largely dismantled, forcing people to pay for basic goods like health care and education. Absent new programs that fill the void, households are likely to continue putting away as much as they can, limiting their spending.

Household incomes have effectively been limited by a range of policies that favor state-owned companies -- still the dominant force in the Chinese economy. The state hands these enterprises subsidized raw materials along with cheap finance, making sure funds are ample by capping interest rates that banks are allowed to pay Chinese savers.

In short, putting more money in the hands of Chinese consumers entails taking it away from protected state companies.

Former Australian Prime Minister Paul Keating asserted that China’s leadership must be decisive in "shifting capital from state-owned enterprises to the household sector," suggesting that anything short of a full-scale reworking would stunt national development.

"The party has big decisions," Keating told the 21st Century Council. "Is it brave enough to make the shift? This is a very important moment for China." Halfway measures, he added, would yield "a much slower rate of growth than otherwise."

Keating was merely saying forcefully what Chinese officials have implicitly acknowledged. No less than Chinese President Xi Jinping spoke of an unwavering commitment to "comprehensive reform," affirming the notion that many changes must be made at once to further China’s development.

Xi, an imposing physical presence, exuded confidence that the needed reforms will be delivered, though he eschewed details. He pointedly dismissed a scenario raised repeatedly by lower-ranking officials -- the possibility that China would fall into a so-called "middle-income trap," in which developing countries successfully lift national incomes from abject poverty to moderate levels, only to then stagnate.

"Personally, I don’t think China will fall into a middle-income trap," Xi told us, seated in the Great Hall of the People in front of an enormous mural of the Great Wall. "We still have strong internal growth and dynamism. China will continue to sustain a healthy growth momentum for the next 10 to 20 years."

Only a fool (or someone trying to sell a book on China’s imminent collapse) would dismiss that possibility. China has for years defied prognostications that its economic miracle has reached the end. Yet just as China confronts complex structural challenges at home, foreign conflicts now exacerbate its difficulties.

Ordinary people tend to grumble that the party is like a secret society operating largely to benefit its own members, with current practices far removed from its ideological roots. Officials who rule as champions of Marxism now ride to work in chauffeured Mercedes from plush developments with names like Emperor’s Mansion. The party has maintained legitimacy via two key avenues -- by delivering once-unthinkable economic opportunities and by tapping into nationalist sentiments. But lately, the latter appears to be challenging the former: China is enmeshed in confrontations with its neighbors -- not least, Japan -- over the control of tiny and largely uninhabited islands in the East China Sea. Here is a situation that has the potential to spiral into crisis.

For the party, nationalism has proven an irresistible means of currying public favor. The senior officials who appeared at the 21st Century Council laid out a narrative of modern Chinese history that begins with the Opium Wars of the 19th century, in which the British used military might to force lucrative narcotics on the nation. The following century, the Japanese invaded, committing grotesque atrocities seared into memory. Whatever the party may be in the Chinese imagination, it is credited with vanquishing the Japanese, ending colonial humiliation, and building China into a modern power. That is not nothing.

Yet the party's reliance on nationalism as a mobilizing force has sometimes collided with economic objectives. Tensions have eased over Taiwan, the self-governing island that China has long-regarded as part of its territory. But now the same nationalist passions that fueled calls to claim Taiwan by force have shifted to maritime confrontations with Japan.

Some commercial interests are on the line -- the islands hold energy stocks and fisheries -- but the standoff is fundamentally about China’s place in the world, its designs on reclaiming its perch as a superpower, and a demonstration that it has outgrown the weakness of its colonial past.

Some suggest the party is merely returning to a familiar device, using nationalism to stir up public fervor while laying the ground for a new wave of economic reforms. Whatever the motive, the hostilities risk economic damage. Japan is one of China’s largest sources of foreign investment and a major destination for Chinese-made goods. A sustained rupture in relations could cost jobs and slow growth.

Senior Chinese officials in the People’s Liberation Army expressed hopes that a diplomatic solution may be found. But they also warned stridently that they will not shrink from unleashing force to redress what they portray as the latest affront to China’s sovereignty.

All the while, a new force is proliferating across China that may complicate the party's control and its willingness to advance reforms -- the explosive growth of social media, particularly among young people.

More information flowing outside of official channels means more public awareness of conditions both within and outside China, generating new demands for freedoms and material gains. This could pressure the government to move faster on reforms in a bid to keep pace with public demands. Or it could spook the party into trying to impede change in an effort to maintain control.

Within the party, awareness that the status quo appears increasingly unsustainable operates alongside legitimate fears of change. China’s development formula has worked with spectacular effect, even as the attendant problems pile up. Any threat to continued growth could spawn a threat to the party's continued hold on power. The risks of action and inaction alike appear considerable. Yet the prospects for increased prosperity appear equally plausible: Not by accident, China has turned itself into the world’s second largest economy.

How does China clean up the seamy underside of its relentless growth without choking off growth itself? This is the puzzle China’s leaders face.

It has long been a cliché that anyone who claims to know with certainty what the future holds for China cannot possibly grasp the complexities at play. There is much truth here, never more so. Conversations with China’s leaders left me with the impression that genuine debate over the course of reforms is underway, with no easily discernible outcome.