What Do China’s Leadership Changes Mean for the Economy?

China’s once-in-a-decade leadership transition starts on Thursday in Beijing, and the rest of the world is waiting to see how things would change in the coming days in one of the most important economic powers in the world. China is now the world’s largest exporter, the second-biggest economy overall, and controls over $3.2 trillion in foreign exchange reserves.

In such a scenario, who makes the Communist Party’s all-powerful politburo standing committee is being watched very closely. Current vice president Xi Jinping is expected to receive the position of the general secretary in the committee, and eventually take over as the country’s President’s from Hu Jintao. Li Keqiang, who is one of China’s vice premiers, is likely to assume the premier’s role, replacing Wen Jiabao. The remaining positions in the committee remain uncertain and some even expect its size to be cut to seven from the current nine members. The final outcome is expected to be made public by November 14.

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There are also some concerns that more conservative candidates may edge out the more reform-minded ones, which may put in danger economic changes required to turn the country’s growth model from exports to internal consumption. The new leaders will also have the hard task of convincing the country’s elites to accept changes to a long-standing economic setup.

Not making these transitions will put the country’s economy in risk of major damage, Peking University’s Guanghua School of Management professor Michael Pettis told Market Watch. One of the major issues threatening financial collapse relates to bank lending pushing investments. “I don’t think this is sustainable,” Pettis said. “If you keep investment rates high, you run into the debt problem, and I think China fully understands that.”

While continuing old policies may even fuel a 1930s-style Great Depression, Pettis remains optimistic for now. “It looks like the new group understand the urgency of rebalancing” the economy, he said.

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