China's new leaders believe the country's economy cannot make the next leap in its development without significant modernization and structural reform.
However, a year after taking office, President Xi Jinping and his premier, Li Keqiang, have made it clear that political reform is not on the table.
In the last few months they have launched a crackdown on dissidents and independent thinkers, reasserted the supremacy of Communist Party "mass line" ideology and smothered factionalism by toppling several senior party figures in an anti-corruption drive.
Their approach is being called "tightening the political grip and loosening economic control."
Yet there are few, if any, examples where authoritarian regimes have managed to maintain a one-party state while broadening economic freedom.
There is a built-in contradiction in the approach, which almost always means that one or the other arm of the policy fails. The overwhelming priority of the leadership remains the maintenance of the Communist Party's monopoly on power.
This suggests that when in the future, as in the past, there is a conflict between the demands of economic reform and the sanctity of one-party power, it is the economic imperatives that will be cast aside. The overwhelming constraints on the Chinese economy are political.
Xi and Li are undoubtedly genuine in their commitment to the idea of economic reform. Both men have for months talked publicly about the necessity of making the next leap 35 years after former paramount leader Deng Xiaoping adopted a form of market economics that has both changed China beyond recognition and given it international weight it has not held for 200 years.
That initial burst of energy is, however, fast running out of fuel, and the economic problems faced by President Xi and Premier Li are formidable.
China's role as a source of cheap labour fuelling an export-driven manufacturing economy is not what it was.
There has been a massive and persistent misallocation of investment inside China. The political necessity to produce attractive growth figures has spurred over-investment in infrastructure and real estate.
Local authorities are deep in debt as they try to fulfil the responsibilities handed them by central government without the parallel power to raise revenue. Municipalities have also sparked persistent social unrest by seizing peasants' land to sell to real estate developers, in order to fill local government coffers and line their own pockets.
Despite a decade of efforts by Beijing, domestic consumption remains a minor segment of the economy.
State-owned enterprises play far too large a role in the economy, some of them operating like semi-independent principalities. Indeed, in the last decade the role of state enterprises in the economy has grown, while that of private companies has shrunk.
Peasant agriculture is embedded in the system, but no longer meets China's food production needs. Reform, however, confronts the party with changing significant elements of its power, such as the household registration system and land ownership.
There is also a significant lack of trust in the leadership among China's 1.3 billion people.
This has been generated by a multitude of economic and social problems. They include the life-threatening pollution produced by rapacious and unregulated industries, social services that no longer meet people's needs, the constant predatory demands of corrupt officials, and the growing disparity between ordinary Chinese and a small, vastly wealthy aristocracy of party leaders and their relatives.
The general outline of the reform package was agreed by Xi, Li and other top party leaders in Beijing last week at the Third Plenum of the 18th Party Congress that oversaw the leadership transition a year ago.
Details of the policy will not start appearing until next year, however, after individual ministries have put flesh on the bones of the reform policy handed to them by the plenum.
As usual in China, caution is to be expected and social stability will be the overriding priority. •
Canada could reap big dividends from China's economic reform
Canada can have a significant stake in China's economic reform program if it results in the creation of a larger middle class with middle-class needs and desires.
Cereals and natural resources have dominated Canadian exports to China since the start of modern trade in the 1960s.
That can change, however, if China's new leaders manage the difficult and uncertain task of addressing the increasingly dangerous defects in the economy, while maintaining the dominance of the Communist Party's monopoly on power.
If there is a Chinese transformation from an economy based on export of manufactured products and infrastructure investment to one anchored in domestic consumption and service industries, the changes in demand will be enormous.
"It is about the demand for a higher quality of life, which inevitably means greater demand for services that make life more comfortable," said Asia Pacific Foundation of Canada president Yuen Pau Woo in the latest issue of Business Forum, the magazine of the Canada-China Business Council.
"This is a big opportunity for Canada: the chance to provide high-end services – including health care, architectural, financial, education, insurance, accounting, music, hotel management – the list goes on and on," said Woo.
At the moment only about 14 million Chinese households – about 30 million people – can be defined as middle class with incomes in the $16,000 to $34,000 range.
However, a recent report by the global consultancy McKinsey and Company predicted that by 2020 there will be about 167 million Chinese households, 400 million people and a third of the 1.3 billion population, in this income group.
That depends on Beijing's leadership following through on its stated objective of trying to narrow the disparity between China's rich and poor.
If it happens, a prime change is likely to be in service industries, with increasing demand for the products listed by Woo, and some of which Canadian companies are already supplying in China.
At the moment service industries represent only about 40% of China's gross domestic product, and that proportion has changed little in 10 years. In fully industrialized countries, service sector businesses represent 70% or more of annual national income.
