07/03/2013 02:14 pm ET Updated Sep 02, 2013

What's Xi's Textbook for Upcoming Reforms?

At a Politburo meeting earlier this week, Chinese President Xi Jinping called for senior Party officials to turn their attention to the past in the run-up to the Third Plenum of the 18th Party Congress this fall, where major new reforms are expected. "History is the best textbook," Xi said in a study session on the future of "socialism with Chinese characteristics."

But Xi didn't go into detail about which chapters of this textbook he's reading. What is the history that Xi has in mind?

Observers inside and outside China are trying to figure out what Xi's reform agenda will be -- and, in recent weeks, Chinese leaders have given a new cluster of clues. First, let's look at what we already know Xi is trying to accomplish. He has put forth an important -- if largely undefined -- ideology, the "Chinese Dream," promising greater prosperity and "national rejuvenation." Within this broad frame for future policymaking, Xi has taken first steps in a still-unclear direction. He has declared that China must shift its development model from export-driven growth to increased domestic consumption, requiring reforms to banking and state-owned enterprises, among other areas. And he has prioritized cracking down on official excess and corruption.

One recent example shows how high the stakes are. In recent days, Xi, Premier Li Keqiang, and other senior Party leaders have begun to take steps to cut back on credit expansion. This liquidity squeeze, inevitably unpopular but which most analysts considered necessary, briefly convulsed global markets and drew criticism within China from conservatives and reformers. With critics at every turn, what will Xi's administration do with the "Chinese Dream," and how will they pull off even more bruising reforms that may lie ahead?

Keeping Xi's comments about "history" as "textbook" in mind, it's worth looking at a number of possible historical parallels. The most obvious optimistic case is the 1993 Third Plenum of the 14th Central Committee, where China's "socialist market economy" ideology received official blessing alongside an ambitious reform blueprint. Other commentators have compared Premier Li Keqiang with the visionary former premier Zhu Rongji, who slashed into state-owned enterprises in the mid-1990s.

Yet new clues from recent weeks point toward one key moment in the history of China's reforms that deserves greater attention: the Thirteenth Party Congress in 1987. Although it is a politically sensitive event that few in China talk about publicly, this key meeting offers insights into how President Xi Jinping has been using his new "Chinese Dream" concept--and what pitfalls today's leadership may be working to avoid.

By October 1987, China's reforms under "socialism with Chinese characteristics" had taken off, bringing record growth along with many new problems. Paramount leader Deng Xiaoping had recently promoted Zhao Ziyang from Premier to Party General Secretary. Like today's leaders, Zhao wanted to incorporate a greater role for market forces in China's economy, and knew that he needed to clamp down on spreading corruption. But he didn't want to destabilize the socialist ideology that undergirded the Party's authoritarian control.

In the months before the Congress, Zhao came up with an ingenious solution: He would declare that China was in the "initial stage of socialism." In this "initial stage," Zhao argued that China would need to use capitalist tools to develop its economy. It worked, winning support from reformers, holding conservatives critics at bay, and receiving the Congress's endorsement--and, in fact, China still formally remains in this "initial stage of socialism."

Today, Xi Jinping appears to be using his "Chinese Dream" concept in a similar way. Although some commentators have highlighted the nationalism of Xi's idea, there's another way to look at it: The "Chinese Dream," still largely undefined, is a way of placating both reformers and conservatives as Xi and his team figure out what reforms they plan to implement. The "Dream" promises a new era and temporarily holds off criticisms of specific policies or decisions that depart from the status quo. In other words, like the "primary stage of socialism," it can be seen, at least in part, as a way of giving Xi ideological space to develop the content of his own vision for China's future.

At the 1987 Congress, Zhao began to put meat on the bones of the "initial stage of socialism." His Work Report reframed the relationship between the state and the economy in more market-oriented terms, with a lucid new slogan: "The state manages the market, and the market guides the enterprises." The report permitted the continued emergence of private enterprises, while calling for reforms to increase the demand responsiveness of state-owned enterprises. Among other political reforms, Zhao's report also called for an increased role for the media to monitor official corruption (yulun jiandu). These same issues remain pivot points of debate today--and they are precisely what many reformers in China hope the 2013 plenum will address.

One criticism that has been leveled against Zhao's 1987 report -- and that Party Congress meeting as a whole--is that it only really existed on paper. Prioritizing substantial steps forward in terms of ideology, Zhao's success in 1987 didn't translate immediately into action. This, in turn, meant that when a conservative resurgence began in 1988, reforms were put on hold -- and, with the Tiananmen tragedy of 1989, this chill lasted for several years. Party leaders today will doubtless learn from this shortcoming, even as they also follow Zhao's successful strategies.

Zhao Ziyang is a persona non grata in today's China because of his role in opposing the Tiananmen Square crackdown of 1989. As a result, the 1987 Congress gets much less attention than other equally important events in Chinese reform history. But it is very likely that these lessons of 1987 matter to the Chinese leadership, because many of today's senior economic policymakers worked under Zhao or participated in debates around the 1987 decision. These figures include central bank governor Zhou Xiaochuan, Finance Minister Lou Jiwei, and Liu He, who directs the Leading Group on Finance and Economics. Premier Li Keqiang's Ph.D. adviser, the economist Li Yining, published much of his best-known work in debates leading up to the 1987 decision. This history is thus very much alive in the experiences of China's decision-makers.

Much of this history may not appear in the textbooks that Chinese students use. But the 1987 Party Congress remains an important part of history's "textbook" on China's remarkably successful -- and ongoing -- economic reforms. As we try to make sense of Chinese policymakers decisions' ahead of the upcoming plenum, we shouldn't skip the chapter on the lessons of 1987.