09/04/2012 03:50 pm ET Updated Nov 04, 2012

Hold Your Breath

Leadership transitions both at home and abroad are often met with bated breath. This is particularly true for the upcoming changeover in China's top brass. The top decision-making body in the Chinese Communist Party, the politburo standing committee, is set to see an infusion of new blood. Seven of the nine men holding the country's most powerful positions will retire in just a few months and next year, a significant proportion of China's cabinet, the State Council, is set for a reshuffle as well. The process is shrouded in mystery, a frustrating state of affairs for investors and other observers because the direction of change in China will be underpinned by the result.

Several constants will remain. The Chinese Communist Party itself is expected to maintain its hold on power in the next five years. There is little question as to who will take the top reins. The two men slated to replace the outgoing president, Hu Jintao, and premier, Wen Jiabao, have been publicly groomed for these positions since 2008.

But China is facing more uncertainty than in the last comparable major transition, which took place in 2002. At that time, the country had just entered the WTO and was about to embark on a decade of explosive growth. Now, leaders are searching for a way to steer the economy towards a more sustainable, slower level of expansion, all in a sluggish and unstable global macroeconomic environment.

At the same time, the leadership's fear of domestic instability is intensifying. China's citizens are becoming increasingly influential through the proliferation in microblog use, as unwelcome stories that would have been little trouble for the official organs to quash or simply ignore several years ago are now raised to national prominence in seconds. Although much content is rumor-mill fodder, exposed corruption and ensuing outrage is being increasingly met by official acknowledgment and, at times, official action, lest the situation spiral into more widespread discontent. The rising power that citizens have begun to wield is unnerving the central leadership. And so in this time of transition, the tricky balance between economic and social stability is paramount.

In Xi Jinping and Li Keqiang, who are set to inherit the roles of president and premier, respectively, one can expect continuity of existing policy currents. For example, Li Keqiang has very publicly vowed to raise the availability of affordable housing after taking over the economic program of Wen Jiabao, and keeping housing prices from rising too much will remain a priority. The potential for future shifts, then, depends largely on who is selected to the other open positions on the politburo standing committee. Major political reform is unlikely -- the downfall of Bo Xilai, a maverick party chief who made a public play for a position in the top leadership, has ensured that.

But the thrust of much-needed economic reform has yet to be clarified. And here, the choices matter. Those being widely tipped for the top positions have different appetites for it. Wang Yang, the current party chief of economic powerhouse Guangdong, for example, has long pushed moving the economy up the value-added chain and strengthening the role of private enterprises. Wang Qishan, who co-chairs the economic track of the U.S.-China Strategic and Economic Dialogue along with Timothy Geithner, handles China's financial portfolio and is a strong advocate of financial reform.

By contrast Zhang Dejiang, who replaced Mr. Bo as party secretary of Chongqing earlier this year, is perceived to be an economic dinosaur favoring state-owned enterprises. He received his degree in economics in North Korea. As decisions are believed to be made by consensus, the character of the standing committee is central to the direction, or even the possibility, of much-needed reforms. Such changes will determine the longer-term direction of the world's second-largest economy.

The identities of the individuals to be elevated to the standing committee are, for now, only rumors. The decisions are likely still being debated, and much is still unknown, including the exact date of the party congress and the number of positions that will actually be filled. (There is speculation that the number of positions will be cut from 9 to 7.) But watch closely. Although a political sea change is not in the cards, the next few years will be a transformative period for China's economy. As the party's legitimacy rests on its ability to provide adequate economic opportunities for its massive population, this is a transition that requires great care.

Victoria Lai is the Access China analyst for the Economist Intelligence Unit.