Xi’s Got Issues

There is no fiscal cliff in China, and probably no sex scandal at a spy agency waiting to burst, yet China’s new leader, Xi Jinping, is under just as much pressure as U.S. President Barack Obama to hit the ground running. Xi is assuming control of the Communist Party at a time when there is a whiff of crisis in the air. Now the party’s general secretary and chairman of the Central Military Commission, Xi will not officially become president until the National People’s Congress meets in the spring. Even after the transition is complete, Xi will still face the task of building support for his policies within the bureaucracy.

Xi’s inbox, however, is already full of pressing problems that cannot wait until he is fully in control. On the economy, foreign policy, and domestic politics, Xi will inherit a series of crises that — if allowed to fester or drift — could develop into critical challenges to the legitimacy of the Communist Party. His first 100 days will be critical.

Momentum matters in politics, even in authoritarian regimes. The last Chinese leadership transition, 10 years ago, was also accompanied by a sense of crisis — that time provided by the SARS virus. Just as Hu and Wen Jiabao were getting settled into their new roles as president and premier, respectively, in the spring of 2003, stories began to circulate that Beijing hospitals were ferrying SARS patients around town to evade World Health Organization inspectors. As the extent of the epidemic in China and the official coverup became apparent — by late April, more than half the 4,649 cases in the world were in China — for a brief moment the Communist Party looked vulnerable. ("So is SARS China’s Chernobyl"? the Economist asked in April 2003.)

Chernobyl it was not. Hu and Wen reacted swiftly, sacking the health minister, imposing quarantines, and generally giving the impression of a new broom. Their quick response allowed the new leaders to make a strong start. The challenges facing Xi are less dramatic than SARS, but just as dangerous to the party — a stalling economy, a nasty territorial dispute with Japan, and a growing sense of disillusionment with the heavy-handed political system. Like his predecessors, Xi needs to use his honeymoon period to provide a new sense of direction, before the problems start to engulf him and his team of new senior leaders.

Xi’s most pressing overseas concern will be the tense standoff with Japan over the small group of islands the Japanese call the Senkakus and the Chinese call the Diaoyus, which Japan administers but which China (and Taiwan) claim. This dispute has simmered for decades but flared again this April when the nationalist governor of Tokyo, Shintaro Ishihara, announced that the Tokyo metropolitan government would purchase the islands. To fend off the confrontational Ishihara, Japan’s national government decided to buy three of the five islands from their private owner. China was furious, and it has responded by ordering provocative daily trips by its patrol boats into the waters around the disputed islands, a strategy some analysts believe is a long-term, attritional challenge to Japanese control. It is the sort of situation in which misunderstandings or error could quickly escalate into conflict.

As a result, Xi immediately finds himself right in the middle of a mounting diplomatic crisis, one in which he will need to strike a delicate balance between deftness and toughness. The last thing a new Chinese leader can afford to do is appear weak in a dispute with Japan, a country many Chinese still loathe for its actions during World War II.

Xi has already issued a strident statement on the islands. "Japan should rein in its behavior and stop any words and acts that undermine China’s sovereignty and territorial integrity," he said in September. According to Xinhua, China’s official news agency, he described the purchase as a "farce," and the agency reported, "Xi said the international community will never tolerate Japan’s attempt to deny the outcomes of the World Anti-Fascist War." It is an article of faith in certain sections of the party and People’s Liberation Army that the purchase of the islands is a sign that Japanese militarism is on the rise again.

Others also believe China can use political turmoil in Tokyo to advance China’s claim to the islands. The Global Times is a tabloid that often captures the mood of nationalist outbursts in China. "Japan has to realize the fact that it has always been a small country compared to China, and in the future it will still only be another Vietnam or Philippines," an op-ed in the paper said in late October. "It is better for Japan to show some respect, or it is asking for trouble."

But Xi knows that too abrasive a response could backfire. Chinese officials insist they want to have a productive relationship with Japan, their second-largest trading partner, but if the tension lingers for much longer, it is bound to start affecting the decisions of Japanese companies about investments in China. Japanese companies invested $6.3 billion in China last year and have been one of the main sources of foreign investment over the last three decades. Already, companies as diverse as carmaker Nissan and the corner-store chain Lawson have warned they might cut back expansion plans.

Xi also must worry about the reactions of China’s other neighbors, several of which have their own territorial disputes with Beijing. No matter the resentment that still lingers about Japan in other parts of Asia, most countries in the region are much more wary about the growing power of the Chinese military than they are about Tokyo. In essence, Xi faces an early, compressed test of the dilemma that China has struggled with over the last few years — how to push its territorial claims and channel its desire to become the regional great power, without scaring its neighbors into an ever-closer relationship with the United States.

On the economy, Xi has little time to waste in trying to win support for a series of reforms that are urgently needed but have languished in the face of opposition from within the party. The sharp slowdown in the economy over the last year demonstrates that difficult decisions cannot be delayed. China’s economy has reached a ceiling on its ability to keep growing quickly by throwing huge volumes of cheap credit into investment projects. The old growth engine is running out of steam. At 50 percent of GDP, the current rate of investment "is completely out of whack with anything we have seen in history," Arvind Subramanian of the Peterson Institute for International Economics puts it. New ideas are needed.

Xi’s first task over the next few months will be to try to forge a consensus among the new group of senior leaders about which reforms they need to embrace. The bold route would be to support a package of measures aimed at making the economy — and in particular, the allocation of credit — more efficient. The likely measures would include liberalizing parts of the financial system and exposing some of the large state-owned groups to more competition. This sort of agenda has been promoted in recent years by Wang Qishan, who ascended to the Politburo Standing Committee this Thursday.

The incoming premier, Li Keqiang, who will have day-to-day responsibility for the economy, is generally thought to favor a more cautious approach, including greater emphasis on redistributing income through social spending. He is also a more cerebral character than Wang, who has a reputation as a hard-driving problem-solver and is nicknamed "chief of the fire brigade" for his ability to clean up other people’s problems. There is a system of collective leadership among the seven officials in the Standing Committee, but as first among equals, Xi does have considerable influence. His first order of business will be to head off a bout of infighting among the new collective leadership.

But he also needs to use his honeymoon period to start laying the political groundwork for a new round of reforms. The outgoing team of Hu and Wen found many of their efforts stifled by important parts of the Communist Party establishment — including some of those state-owned groups, the large banks, and local governments, which benefit from overinvestment in property. Over the last few years, these insiders managed to bog down the reform plans of the outgoing leaders. "The combination of state-owned companies and state-owned banks is a massive vested interest that is blocking reforms," says Subramanian. It will be important for Xi to put his weight behind a few ideas at an early stage to try to gain some momentum.

The most delicate area for Xi is political reform. When Chongqing party chief Bo Xilai was removed from his position in March, setting off a political tornado through the Communist Party, it looked for a while as if the entire succession process could be in doubt. That everything is now back on track suggests that the immediate crisis has passed. But the Bo scandal has proved a lightning rod for brewing dissatisfaction about corruption, the absence of the rule of law, and social inequality. Ironically, Bo has become a symbol of corrupt officialdom abusing their positions, but before his downfall he had himself used public anger about corruption to become one of the country’s most popular politicians — a path that other ambitious politicians could still adopt.

Over the last 10 years, Chinese society has changed dramatically, and Wen has regularly said that the political system needs to adapt to these changes. Yet in their decade in power, Hu and Wen left the system largely untouched and in their last four years have governed over a series of crackdowns on many of the very activists and lawyers who were pushing for even gradual change.

Xi is unlikely to unveil a dramatic new package of political reforms any time in the near future. But he is under pressure to set a tone early on, to give some sort of sense of the direction of travel he hopes to take. "They need to act quickly," says Cheng Li, a political scientist at the Brookings Institution. "If not, they are in big trouble."

Xi doesn’t have the luxury of waiting. Although he has been the heir apparent since he ascended to the Standing Committee in 2007, remarkably little is known about his views or the political coalitions and calculations that have brought him to power. To have risen so far in the brutal backroom deal-making of the Chinese Communist Party indicates a high level of political skill, including the ability to remain a political blank canvas.

As the succession has drawn closer, there have been a few hints that for all his discretion, Xi is really a closet reformer — at least on the economy and perhaps on political issues as well. The problem for China-watchers, however, is not just that these are only suggestions, but also that the very same stories were told a decade ago about Hu and Wen. For Hu and Wen, one of the supposed signs of their reformist credentials was their close personal relationship with Hu Yaobang, the liberal party leader who was deposed by hard-liners in the mid-1980s and whose death in 1989 sparked the Tiananmen Square protests. In Xi’s case, the apparent signal has been a recent meeting with Hu Deping, the son of the former leader who has been a lonely standard-bearer for liberal reform within the party.

The mystery will soon start to be revealed. Xi’s long wait to assume power is finally over. But the problems he is inheriting mean he will also have to start declaring his hand.