China is beginning its once-in-a-decade leadership handover on November 8.
The party Congress is expected to last seven days and the Central Committee is expected to be announced on November 14.
In a Q&A with Goldman Sachs' Allison Nathan, Cheng Li, China scholar and Director of Research at the Brookings Institute, said the leadership handover will be watched very carefully for three key reasons.
First, he says this transition is taking place at a time when China has become a very important player in the global economy.
Second, the leaders are not as well understood and their policies aren't clear
Finally, it's because the Bo Xilai incident — which Li says is the biggest political crisis since the Tiananmen incident — raised questions about rampant corruption in the Communist party. And, "it is complicated by the fact that Bo Xilai still has a lot of supporters in the country, who think he was treated unfairly and still believe that he represents the interests of the poor," according to Li.
Here is an excerpt from the interview. [Emphasis Goldman Sachs]:
Allison: What will be the top priorities for the new leadership?
Cheng Li: There will likely be two top priorities. First will be employing structural reforms to address the current economic challenges and discontent among various socioeconomic groups, especially the middle class. Policies to address this will generally promote the private sector and liberalization of China’s financial system. A crackdown on state monopolies will be a must. These monopolies are widely viewed as crowding out private sector investment, shrinking the middle class, facilitating crippling corruption and stalling innovation that China greatly needs to aid its transition from an export-led to a consumption-led economy.
Banking system reform will also be critical to addressing the economic challenges. Reforms might include introducing foreign banks into the Chinese market and systematically increasing the availability of loans to the private sector. The dilemma is that there are powerful interest groups working against these reforms. But I believe that the leadership will nevertheless be committed to undertaking them because the alternative is continued major economic problems and, ultimately, crisis as the middle class’ patience wears thin. Although the recovery of the middle class will be most crucial, there will also likely be policies aimed at the lower- income class, such as social welfare reform, to offer them some kind of incentive and hope for further economic reform.
The second priority will likely be political reform, to address the crisis of legitimacy raised by the Bo Xilai episode. Political reform will likely be centered on the establishment of an independent judicial system and credible rule of law, which will resonate well across all sectors of Chinese society as everyone wants the ability to protect their interests. This is a more effective way forward for political reform than the pursuit of democracy because some factions may resist democracy owing to conservative ideology and political interest, but in a country without the rule of law, no one is safe. In addition, I believe that new leaders will also aim to adopt more intra-party election in order to build new sources of legitimacy. If they cannot make progress on these two areas in a short period of time, I think the Party will be in big trouble.
Meanwhile, here's a great timeline from Societe Generale's Wei Yao that shows reforms passed by previous Chinese leaders starting with Deng Xiaoping in 1979:
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