China’s leaders are worried, very worried. The very thought of social unrest leading to some kind of new cultural revolution scares them, and so it should. It should scare us too. The last thing we want to see in China is some form of Arab Spring. The consequences could be dire. For that matter we don’t want to see some kind of Soviet style collapse. Every member of the Standing Committee of China’‘s politburo knows the dangers inherent in reform that is too fast, or gets out of hand. None of its leaders want to see China’s equivalent of perestroika or glasnost, no one wants to be known as China’s Mikhail Gorbachev.

It is clear that China’s economy cannot rely on exports and investment and government spending much longer. A higher proportion of China’s GDP has to trickle down into wages, creating a consumer led growth trajectory. China’s Premier Wen Jiabao understands this and bangs the drum of higher wages and more consumption pretty much as often as he can. The Premier, who is a fan of Adam Smith by the way, wants to see more capitalism and even some reforms leading to more democracy, is the kind of leader that the West wants to see in China. And for that matter, may well be the kind of leader that is just right for China too.

Alas he is stepping down later this year, as are all his colleagues in the higher echelons of Chinese politics, and no one knows how the transfer of power will go.

The recent case involving Bo Xilai, his wife Gu Kailai, and the British businessman Neil Haywood may give us a clue.

The tale is not very pleasant. Was Gu Kailai really responsible for the death of Mr Haywood? It does feel too convenient. But then again, Mr Bo’s opponents are the very people the West wants to be in the ascendance.

In many ways Bo Xilai was a western style politician – charismatic, camera friendly, a man of the people – but his views and tactics were quite different. Basking in the glory of Mao, he recalled memories of the Cultural Revolution. No wonder China’s reformists were so worried and delighted to be shot of him. It may represent a victory for the reformers, a sign they are winning. And by the way, somewhat paradoxically, they do say that China’s leaders are at the zenith of their power during the last few months of their time in office. Right now, is when Premier Wen is most likely to implement reforms, although it is not clear what the views of President Hu Jintao are on this matter.

Changing an economy from investment and export-led to consumer-led is not easy. And although China’s leadership is clever, it is not omnipotent; indeed it is possible that we overstate its power and influence in the West. The danger is that during this transitory period, China may lurch into some kind of recession  – not recession in the Western sense of contracting GDP, but recession in the sense of much slower growth. And the danger is that during this period, the reformers may find their resolve tested, or their influence questioned.

Articles in this series

China, another Lehman moment and the new industrial revolution

China’s bubble 

The dangers of unrest in China 

Time to celebrate, and welcome debt 

© Investment & Business News 2013